April Monthly Market Update
As at end of April 2021
Lumber Ablaze, Corn Pops
The MSCI World Index (NZD) climbed 2.2% over April. As in March, the main contributor to this performance was the US, where the S&P500 Index returned 5.2%; European indices also contributed positively. Elsewhere performance was mixed, with China flat and Japan posting a negative return.
In the US, it is now clear that the broader economy is pretty well open for business, with frequent anecdotes of difficulty finding labour to fill jobs. Whilst good news, this also means that given the reopening narrative has now mostly played out, prospects for incremental upside are lower. This poses a risk for US equity valuations, where key indices such as the S&P500 and Nasdaq have risen significantly beyond their pre-Covid peaks. For the moment, the market appears focussed on the impact of massive stimulus being dispensed by the federal government. This flood of money is also helping to drive the inflation narrative, which continues to gain traction globally. Whilst this prophesied inflation is yet to manifest in official CPI stats, it is running rampant in primary commodities. For instance, this month, Lumber (+55%) and Corn (+31%) futures were bid up aggressively by financial speculators hoping to profit from a widespread return of inflation. This is already becoming a self-fulfilling prophecy, with major consumer goods manufacturers such as Procter & Gamble, Kimberly-Clark, and Coca Cola flagging price rises to offset commodity cost pressures.
The improved performance of European sharemarkets reflected more positive data releases. The flash headline PMI composite strengthened to 53.7 in April, easily beating market expectations and leading the way for a nice Q2 pick-up in regional GDP growth. This data point is all the more impressive in view of recent lockdowns in several Eurozone countries including France. The real surprise however, was from the UK, whose PMI composite reading for April leapt to 60 from 56.4 in March. This blowout number barely included the economy re-opening, which really only began on April 12th when most retail stores opened their doors.
NEW ZEALAND MARKET
The S&P/NZX 50 Index returned a solid 1.4% in April, however continues to lag behind global peers. Notably the Index return would have been negative without the contribution from Fisher & Paykel Healthcare’s (FPH) 12.0% return. Returns across the rest of the Index were far more balanced between positive and negative, driven mostly by stock-specific factors. Aside from FPH, the two best performers were Pacific Edge (PEB: +13.9%) and Vista Group (VGL: +11.4%). PEB achieved another important milestone, announcing it had been granted insurance coverage for its Cxbladder product from United Healthcare, the largest US private health insurer. This was somewhat offset by the later announcement that the CEO, Dave Darling, was intending to retire in April 2022 following a very long tenure of 18 years with the company.
The two worst performers were Pushpay (PPH: -12.0%) and A2 Milk (ATM: -11.2%), both on the back of analyst downgrades rather than specific announcements. PPH reports its 2021 result in May, and it is expected to be strong given the benefit from the shift to online giving during Covid lockdowns in the US. The market is starting to question whether the recent growth is sustainable given Pushpay’s already high penetration for large churches in the US, which is a relatively niche segment. On the other hand, ATM has been under pressure for some time due to concerns over what looks to be optimistic earnings guidance for 2021. Recent research is highlighting pricing pressure in infant formula due to oversupply and increased competition, and is also questioning the longer term growth outlook for the company. ATM’s main supplier, Synlait Group (SML: -3.8%), was also under pressure this month after its CEO, Leon Clement, resigned with no reason given for his departure and a very short notice period.
Drop the Pressure
The benchmark S&P/ASX200 Index continued to power ahead in April, returning 3.5%. IT and Materials were the strongest sectors, returning 9.7% and 6.8% respectively, whilst Energy was weakest with a -4.9% return. The materials sector has been an ongoing beneficiary of the resurgence in commodity prices – with heavyweights BHP and Rio Tinto buttressed by record prices for Iron Ore, their key commodity.
April’s best performers were at opposite ends of the abstract-concrete spectrum. Networking services provider Megaport returned 29.7% after its quarterly update and outlook were well received. Waste management operator Cleanaway was a close second, returning 29.5% on a novel deal with French competitor Suez which will see it cheaply acquire a collection of strategic assets. The two worst performers were both shaken by geological issues. Whitehaven returned -27.5% after striking hard rock at one of its coal mines precipitated a guidance downgrade, and Beach returned -25.7% after downgrading due to lower pressure impacting gas recovery at one of its fields.
Key macroeconomic updates were broadly positive, with February building approvals up 21.6%, a $7.5b trade surplus, and unemployment narrowing to 5.6% despite higher participation. Interestingly, March employment growth was entirely part-time jobs, with full-time job numbers contracting. An eventful May will provide further angles on the recovery, with the Federal Budget, three of the big four banks reporting, and the first major data releases post Covid subsidies rolling off.
Not even thinking about thinking about raising rates
It was a mixed month for global bond markets with government bond yields generally steady or slightly lower in most regions. The Bloomberg Barclays Global Aggregate Index was up by 0.3%, with corporate bonds outperforming government bonds - albeit this trend was not consistent across all regions. New Zealand bond markets delivered positive returns with the S&P/ NZX Government Bond and S&P/NZX Investment Grade Corporate Bond Indices rising by 0.8% and 0.5% respectively.
On the monetary policy front, there were no signs of changes from any of the major central banks despite generally improving economic data and signs of rising inflation. In the US for example, the CPI Urban Consumers Index is up 2.6% in the 12 months to March and the annual growth rate is higher than at any point in 2019. Employment data also continues to improve, with unemployment rates falling despite increasing participation rates. Unemployment rates in New Zealand and Australia are now 4.7% and 5.9% respectively, and the US is only slightly higher at 6.2%. These are higher than pre-Covid levels, but not far away from long term averages and approaching reasonable estimates of full employment. The challenge for central banks and economists is how to interpret the data given the extreme economic disruption last year, and the equally aggressive fiscal and monetary responses. At the moment, policymakers are operating with a ‘least regrets’ mind-set and the bias is for more (or continuing) stimulus rather than less - at least until the potential costs of these decisions become more obvious and harder to ignore.