May Monthly Market Update
As at end May 2020
The benchmark MSCI World Index (NZD) rose 4.4%, building on last month’s rally. The defining theme for the month was the return of growth. Over the course of the month, the market moved from pricing in reflation to pricing in the combined impact of reopening and stimulus on growth. In the US, equities were buoyed by comments from several influential US Fed governors. St. Louis Fed President Bullard declared the recession in the US was over, and a sharp Q3 GDP snapback was at hand; while NY Fed President Williams said the Fed was not done with using more unconventional monetary policy easing. Adding to positive sentiment, head epidemiologist Dr Fauci now sees a good chance of a vaccine being developed by November or December and that a second wave “isn’t inevitable”.
With the “risk on” investment environment gaining traction, Gold’s ‘safe-haven’ outperformance began to wane as the month progressed, whilst on the flipside, industrial-related commodities began to perform well. Oil was the standout, staging one of its best monthly rallies in a decade, outperforming other commodities and all sharemarkets. Crude’s performance reflected more than just the expected impact on demand of the economic recovery in the second half of the year. The rally was supercharged by supply side adjustments as OPEC and other major oil producers quickly curtailed production.
Although positive economic data is still scant, the widely followed global manufacturing PMI has begun to pick up, rising to 42.4 in May from record lows of 39.6 in April. This improvement is nothing major yet, but will likely gather momentum (a reading over 50 is expansionary). The market is taking heart from the China experience where its PMI quickly rebounded above the 50 level once lockdown measures were significantly relaxed. Considering the large amount of both monetary and fiscal stimulus injected in the global economy, investors are betting the Chinese experience will repeat itself across most economies during the next quarter.
NEW ZEALAND MARKET
May saw sharemarkets continue to recover ground lost in March, albeit at a pace more moderate than April. The S&P/NZX 50 Index returned 3.3%, trailing slightly behind most of its global peers. The country also moved down to alert level two, which saw many companies return to a type of business-as-usual, while others continued to deal with the impact of lockdown. We saw examples of this with Tourism Holdings (+37.5%), Sky City (-8.3%), Fletcher Building (-5.1%), and Air New Zealand (+1.9%) all announcing significant restructuring, with the latter even reducing the size of its executive team.
Some companies continue to benefit from the disruption by virtue of their business models, as seen with Pushpay Holdings. Church closures have seen increased demand for, and uptake of Pushpay’s mobile payment services. It rallied 77.3%, after reporting substantial revenue and earnings growth for FY20, making it the top performer in the Index. Kathmandu, which has mainly been on the wrong end of the lockdown winners and losers, had some respite in May after reporting recent online sales up to three times higher than last year. Kathmandu returned 31.7% for the month.
Energy companies, New Zealand Refining and Z Energy were the worst performers, returning -23.9% and -9.0% respectively. The staggered return to normal activity levels continued to weigh on petrol volumes, and as borders remain closed for international travellers, demand for jet fuel remained significantly depressed. Z Energy, who not so long ago was known for its relatively high dividend yield, not only cancelled its FY21 dividend, but also tapped investors for $350m to shore up its balance sheet.
April’s relief rally moderated in May, with the benchmark S&P/ASX 200 Index returning 4.4%. The Index was supported by the heavyweight Financials and Materials sectors, which returned 5.2% and 8.1% respectively. IT was the strongest sector with a 14.5% return, and Healthcare the weakest with a -5.3% return, weighed down by CSL.
Afterpay outperformed notably on the back of a Chinese conglomerate Tencent becoming a substantial shareholder and an update on its US customer base growth. The stock returned 52.0% and closed the month at almost six times the lows plumbed in March. Aerial imagery company Nearmap was also a top performer, returning 50.2% amid a narrowing of guidance and affirmation it was on track to reach cashflow break-even by the end of June.
Capital raising activity continued, with issuance from Newcrest, Incitec Pivot, and Qube Logistics helping to push total capital raised to over $20b since the end of March. Precautionary behaviour from businesses was also evident in April employment data, with a net loss of 594,000 jobs lifting the unemployment rate from 5.2% to 6.2%. This outcome was less severe than expected, owing to a large decline in workforce participation and the government’s Jobkeeper scheme. The scheme’s cushioning effect can be seen from the 750,000 workers who kept their jobs but worked zero hours. Against this backdrop, the RBA reiterated its commitment to maintaining accommodative policy, and tapered its purchasing of government bonds, citing improved functioning of financial markets.
Moving down the levels
It was another strong month for fixed interest markets. Central banks kept bond yields low, while equity markets rallied on the back of deceleration in new coronavirus infections and a general easing of restrictions. Market sentiment has become more positive for risky assets, with a high degree of optimism in a sharp economic recovery materialising as we start to return to more normal conditions. This has led to high yield and corporate bonds outperforming government bonds. We are also seeing corporate bond issuance pick up due to more stable market conditions. In the US, it is already a massive year for corporate bond issuance, with over $1 trillion issued so far. We also saw the first corporate deals in Australia this month with Woolworths, Macquarie Bank, and Spark New Zealand issuing new bonds.
New Zealand reflected a similar trend to global markets, with the S&P NZX Corporate Bond Index returning 0.8% compared to 0.2% for the S&P NZX Government Bond Index. It was a busy month with the RBNZ releasing its monetary policy statement, and the government handing down its budget the following day. The key points from the RBNZ were an increase in the Large Scale Asset Purchasing program (LSAP) to a maximum of $60 billion, and guidance for no change to the OCR until early next year. In the budget, the government announced an additional $50 billion of spending (on top of the $12 billion announced last month). The medium term forecast from the treasury is for net debt to GDP to peak at 54% in 2023, which would be the highest of level of debt since the early 90s. At the moment the NZ government bond market has been dominated by RBNZ buying under the LSAP, which has driven yields down. This is because the quantum of RBNZ’s purchases have been relatively higher than the new issuance of NZ Government bonds from the Treasury. We do think that this is likely to change as government bond issuance starts to increase more rapidly. It is possible that the LSAP may be increased again if necessary to keep bond yields down.