August Monthly Market Update
As at end of August 2021
Luxury out of fashion
International equity markets continued to trend upwards throughout August, with the MSCI World (NZD) Index registering its third consecutive positive monthly return, at 1.6%. Offshore returns were slightly diluted by a stronger NZD, which initially declined in reaction to the Delta outbreak. Local emergence of the strain also resulted in the entire country being moved to the most restrictive level of lockdown, prompting the RBNZ to hold off from hiking the OCR. The NZD subsequently pared its losses and continued to rally with the New Zealand Trade Weighted Index rising 1.0%.
In the US, the S&P 500 Index was one of the top performers among developed markets, returning 3.0%. The technology giants such as Alphabet, Apple, and Microsoft were the major contributors, responsible for almost a third of the S&P 500’s move. However, in terms of absolute performance, Financials was the top sector. Rising US Treasury yields were a major tailwind for the sector, underpinning a broad-based rally across banks and insurance stocks. Energy was the worst performing sector, as oil prices saw their first decline in many months due to mounting concerns over the demand outlook as Covid-19 cases surged globally.
Across other equity markets, the Japanese Nikkei 225 also delivered a solid return of 3.0%, with strong broad-based performance seen from Industrials and Health Care. This was also the case in Europe, where the STOXX Europe 600 Index returned 2.2%. However, a notable exception were major luxury brands such as Burberry Group (-10%) and LVMH (-7%), with sentiment turning sour following comments from the Chinese President, Xi Jinping, outlining his intentions for “common prosperity” via income regulation and redistribution of wealth.
NEW ZEALAND MARKET
You wouldn’t know by looking at the local sharemarket that New Zealand spent the second half of August under a level 4 lockdown. Taking renewed lockdowns in its wake, the S&P/NZX 50 Index returned a respectable 5.0% for the month, which is well ahead of its global peers. This performance was on the back of a solid reporting season, which has so far seen a majority of companies report earnings ahead of expectations. That being said, the mantle for top performer was on account of M&A rather than a strong result. Z Energy (ZEL) rallied 19.0% on the back of a takeover offer from an Australian fuel group Ampol (ex-Caltex), who made a non-binding indicative offer at $3.78/share. Ampol is undertaking a four-week due diligence process in order to develop its proposal whereby ZEL’s shareholders would need to approve the final offer. After that the deal would still need Commerce Commission approval to go ahead.
In other M&A news, Pushpay (PPH +4.1%) has agreed to buy a US faith-based streaming platform provider Resi Media, plus there was press speculation that a2 Milk (ATM -3.1%) could be a potential takeover target. This saw ATM’s share price rise sharply before backtracking just as quickly, after another disappointing earnings result highlighting expectations of further headwinds in the coming year. This also had a knock-on effect on its biggest supplier, Synlait Milk (SML -11.5%), which ended as the worst performer in the Index.
Other standout performers were from the Aged Care sector, which saw Ryman Healthcare and Summerset return 17.5% and 17.1% respectively. Ryman carried over strong momentum from its positive AGM update at the end of July, plus Summerset’s reported profits were up significantly, supported by valuation gains. The sector has enjoyed a major tailwind from rising house prices as REINZ data shows New Zealand median house prices are up 25.2% in July for the rolling year.
Civilisation in transition
Australia’s benchmark S&P/ASX200 Index returned 2.5% in August, with the IT sector (+17.0%) leading the charge. In a generally buoyant corporate reporting season, only the Materials (-7.3%) and Energy (-3.9%) sectors had negative returns. Materials was skewed by the heavyweight BHP’s 14.7% drop on the back of a 25% fall in iron ore prices and arbitrage activity after it announced a unification of its dual-listed structure.
TThe more leveraged iron ore miners, Champion and Fortescue, were the worst performers this month, returning -22.5% and -15.7% respectively. Best performing were logistics software developer WiseTech, which rallied 57%, and AfterPay with a 39.2% return. WiseTech’s spike in response to its positive result and guidance announcement earned it a ‘pleaseexplain’ from the ASX. AfterPay gave a solid trading update and simultaneously announced an all-stock takeover proposal from a US FinTech Square, which overshadowed its subsequent results.
The reporting season produced slightly more beats than misses, along with distinct themes of transition, uncertainty, and acquisitions. Fiscal 2021 was frequently cited as a ‘transitional’ year given atypical factors impacting earnings, outlook statements and guidance were qualified with more uncertainty, and M&A also featured prominently. Big deals announced this month were a tie-up of Woodside and BHP’s petroleum assets and Ampol’s ditch-crossing proposal for Z Energy. Mid-caps were also active, with the likes of Steadfast, Megaport, Jumbo, and BWX all announcing acquisitions.
Whilst there is not a single impetus for the ongoing wave of M&A activity, the combination of high valuations, cheap money, and the challenge of growing earnings off an artificially elevated base clearly incentivises inorganic growth. In aggregate, consensus expects S&P/ASX200 companies to deliver 17% earnings growth in the next twelve months. With questionable recurrence of wage subsidies and stimulus-fuelled demand, uncertain outlooks on bank profits, and lower iron ore prices, delivering this level of earnings growth looks to be a tall order, particularly against a backdrop of continuing lockdowns and disruptions.
One case is all it takes
New Zealand bond markets experienced a turbulent month with a nationwide lockdown announced after a single Covid-19 case was discovered in the community on 17 August. Initial hopes of a short and sharp lockdown quickly evaporated as more cases came to light, and the entire country remains under severe restrictions, with Auckland still in full lockdown. The discovery of the first case occurred the day before the RBNZ was poised to deliver its first interest rate hike since 2014, and the market was actively speculating on whether this would be 25bp or 50bp. Whatever the RBNZ had pencilled in, they were forced to put it on hold with the OCR kept unchanged this month. Despite this, it was obvious from reading the accompanying monetary policy statement and public commentary from the Governor that they see this as a temporary pause, with interest rate hikes still firmly on the table at the next meeting in October.
The communication from the RBNZ has been enough for the market to look through the current Covid-19 outbreak, and bond yields have been rising in the anticipation of interest rate hikes to come. This has led to negative returns for the NZ bond markets with the S&P/NZX Government Bond Index falling by 1.3% and the S&P/ NZX Investment Grade Corporate Bond Index falling by 0.6%. It is interesting to contrast these moves with the Australian market where both government and corporate bond indices delivered positive returns. Australia is also dealing with a Covid-19 outbreak and have significant (although less severe) mobility restrictions across most of the country; the key difference is a far more dovish central bank, with the RBA not talking about interest rate hikes until 2024. This divergence in policy has opened up a significant difference in bond yields and returns between the two markets.
FUND PERFORMANCE OVERVIEW