September Monthly Market Update
As at end September 2020
Contested prospect vexes markets
The benchmark MSCI World (NZD) Index fell 1.3% over September as markets moved into risk-off mode, a shift which also saw the US dollar rally hard after an extended period of weakness. The move in the US dollar undercut the commodity complex, especially the prices of precious metals and oil. This weakness spilled over into commodity-based currencies like the NZ dollar, which fell 1.7%, partly offsetting the impact of some of the larger global equity market falls on NZD denominated returns.
What became apparent as Q3 drew to a close is that high frequency economic data, not just in the US but globally, is showing signs of cooling-off. In the US there are still remnants of strength in manufacturing, but this is mainly due to inventory replenishment and channel restocking after stockpiles were depleted from March to May. The uncertainty around the US election is clearly weighing on market sentiment too. It is now increasingly likely that unless either side achieves a landslide victory on November 3rd, the courts will be forced to determine the winner, which could take months, echoing the 2000 election.
A vaccine that can be broadly distributed does not appear likely now until the second half of next year. What investors will be relying on in the meantime is continuing policy stimulus. Companies who cater to the ‘stay-at-home’ economy are likely to benefit for some time yet, and this will continue to be a powerful thematic for investors around the globe.
NEW ZEALAND MARKET
Heavyweights drag on market
Faring better than several global peers, the S&P/ NZX50 Index declined 1.6% in September, albeit like August, the return was skewed by the two heavyweights. The a2 Milk Company (ATM) and Fisher & Paykel Healthcare (FPH), which together make up over a quarter of the index, returned -17.5% and -9.7% respectively. ATM was the worst performer after it issued a profit warning citing further disruption in its daigou (informal reseller) channel, particularly around Melbourne, where lockdowns have been more severe. This also had a knock-on effect for Synlait Milk (SML) who manufacture infant formula for ATM. SML also had a disappointing FY20 earnings result and returned -13.8% for the month.
On the other end of the bourse, SKYCITY Entertainment Group (SKC) returned 16.9% after reporting earnings near the top end of guidance, but more significantly, providing a better than expected outlook for FY21. New Index entrant Serko (SKO) was also one of the top performers, returning 22.6%. SKO was added in place of New Zealand Refining, which returned -7.6%. Another upcoming exit from the Index is Metlifecare (MET) after the Overseas Investment Office approved the takeover by Asia Pacific Village Group at $6.00 per share, and shareholders voted in favour of the scheme shortly after month end.
Diligence Goes, Credit Flows
The liquidity-fuelled bounce came to an abrupt end in September, with the S&P/ASX 200 Index posting a negative return of 3.7%. Energy (-11.1%) was the worst performing sector, and only Healthcare (+0.9%) managed to deliver a positive return.
Thematically, beaten-up companies with perceived leverage to a recovery were the strongest performers. Casino operator SKYCITY Entertainment Group (+21.1%) and outdoor media outfit Ooh! Media (+17.5%) were first and second, with the top five rounded out by building materials – CSR (+16.7%), Adelaide Brighton (+14.5%), and Boral (+13.7%). The worst performing company was mall-heavy property trust Unibail-Rodamco-Westfield (-26.9%), which proposed a large capital raising to ease its problematic debt levels.
Macroeconomic data were mixed this month. Whilst the 7% fall in June quarter GDP was worse than the 6% anticipated, August jobs held up better than expected, as the unemployment rate improved from 7.5% to 6.8% versus an expected deterioration to 7.7%. Given lagging data continues to be muddied by stimulus effects, focus has shifted to leading indicators – notably credit growth. September saw two significant events on the credit front: the RBA extended and upsized its TFF (bank term funding facility) to $200b, and the Treasurer undertook to repeal responsible lending laws. These complementary measures are aimed at boosting credit supply, however the missing piece, awaited in October’s budget, is how policy ensures this gets directed into the right channels to support economic recovery.
Tents pitched for extreme accommodation
It was generally a positive month for global bond markets with government bond yield curves lower and flatter in most countries. This coincided with weaker equity and credit markets following a resurgence in COVID cases, particularly in the UK and Europe. Rising risks of another round of restrictive lockdowns have put a dampener on prospects for fast economic recovery (in the absence of a vaccine).
As such, despite monetary policies already being extremely accommodative, pressure is mounting on central banks to do even more. We have already seen the Fed moving to an average inflation target and recent comments from Christine Lagarde suggest the ECB may be on a similar path. There are mixed views on the effectiveness of negative cash rates but this appears to be the next cab off the rank for New Zealand and possibly the UK, while it remains further down the pecking order for Australia and the US.
The RBNZ left the OCR unchanged at 0.25% at its September meeting and maintained the maximum size of its Large Scale Asset Purchase (LSAP) Program at $100b. The bank continues to highlight its ability to provide additional stimulus through either a negative OCR, a Funding for Lending Program (FLP), or direct purchases of foreign assets. It also noted that these can be deployed independently, whereas it had previously mentioned the FLP in conjunction with a negative OCR. The idea behind the FLP is that by providing cheap funding to banks at a rate close to OCR, it will incentivise more mortgage and commercial lending, and also place downward pressure on borrowing rates.
The RBNZ has certainly been effective in lowering borrowing rates for the government and we observed new record lows for government bond yields (including negative yields for some maturities) this month. This underwrote a strong performance for the S&P/NZX Government Bond Index, which was up 0.9%, while the S&P/ NZX Investment Grade Corporate Bond index was a little less impressive at 0.4%.