December Monthly Market Update
As at end of December 2021
Stocks jingle all the way
Global equity markets made strong gains in the final month of the year with many regional indices pushing to new record highs. The MSCI World (NZD) Index returned 3.4% and finished the year with an annual return of 28.1% - the best calendar year performance since the Dotcom bubble era in the late 90s. There were some intra-month bouts of volatility driven by concerns regarding the new Omicron variant plus the Federal Reserve’s (Fed) announced it would accelerate its reduction of monthly bond purchases. Despite this, the US equity market performed well, with the S&P 500 Index returning 4.5%. Whilst there was broad-based strength across different segments of the market, a number of prominent large-cap and high growth stocks trading at lofty valuations did see a sharp selloff. Across other developed markets, the European STOXX 600 Index returned 5.4%, driven largely by the strong performance contribution from the dominant Industrials and Financials sectors. Japanese equities were slightly more volatile and underperformed, with the Nikkei 225 Index returning 3.6%.
A notable feature was the Fed announcing it would accelerate the reduction of its bond purchasing programme in response to improving labour market conditions, and escalating inflation – which happens to be at its highest level in about 40 years. The Fed now plans to completely wind down its bond purchases sometime around the end of the first quarter in 2022, followed by as many as three rate hikes by end of 2022, plus a further two in both 2023 and 2024. While financial markets have been anticipating a Fed pivot towards more aggressive tightening, concerns have been mounting about what this may mean for equity returns going forward. The improved visibility of the forward policy path and the fact monetary conditions from a historical context will likely continue to remain relatively accommodative over the next year has assuaged some of those concerns and allowed equity markets to advance. Aside from an emergence of a new and more virulent strain of Covid or some other exogenous factor, the direction of future equity returns will largely depend on how successful the Fed is in orchestrating the delicate balance of subduing inflation without causing an economic recession - a feat which historically has been very difficult to achieve.
NEW ZEALAND MARKET
SKY rockets in flight
The S&P/NZX 50 Index closed what was a highly unpredictable year on a high note, returning 2.5% for December, but still ended in negative territory for the full year with a -0.4% annual return. This was well below the double-digit positive returns from most global peers in 2021. Rising interest rates have been a consistent headwind for local companies through the year, especially for defensive yield stocks, with only the industrial property sector bucking the trend , assisted by elevated demand for warehouse space to facilitate growing online sales volumes.
Among individual companies, the year’s top performers were Skellerup (SKL: +79.4%) and SKY Network Television (SKT: +67.7%), with the latter making up most of its return in December. SKT ended head and shoulders above the rest of the Index, returning 58.8% for the month after announcing significant annualised cost savings and a material upgrade to its profit guidance. Other top returns for the month came from Heartland and EBOS, which returned 14.0% and 13.0% respectively in December.
At the bottom of the Index for the year was a2 Milk (ATM: -50.9%) followed unsurprisingly by its largest supplier, Synlait Milk (SML: -33.4%). ATM returned -2.9% for the month, closing another volatile year which featured multiple downgrades and unpredictable demand for its products. The worst performer in December was new Index entrant Eroad which retuned -6.3% since inclusion, but was actually up 3.6% for the full month. Eroad replaced Napier Port in the Index after supply chain issues and cancelled cruise liners put an anchor on the latter company’s share price over the last two years.
Magellan loses Navigation
Capping off a strong year, the S&P/ASX 200 index returned 2.7% for December, taking its return for the year to a respectable 17.2%. Utilities and Materials were the month’s strongest sectors, returning 7.9% and 6.5% respectively, whilst IT was the weakest sector with a return of -5.3%.
Rounding out a frantic year for M&A was CSL’s offer to acquire Vifor Pharma for A$16.4b. The offer for the Swiss group, focussed on kidney and iron deficiency therapies, came with an equity raise of over A$6b in tow. Blue chip favourite Woolworths also came out with major news - a sobering first half trading update flagging over $200m of Covid costs had been incurred in the half. The ensuing market reaction saw the company’s stock down over 10% at one stage.
The two best performing stocks this month were both Lithium concerns. Mineral Resources returned 23.7% after announcing a ‘green lithium’ process development partnership, and Pilbara Minerals returned 23.1% following back-to-back project updates which were positively received. At the other end, fund manager Magellan returned -35.9% amid a PR fiasco around the loss of a major mandate and resignation of its CEO. AfterPay was second worst, declining -23.7% in tandem with suitor Block (Square), as shareholders approved the scrip-for-scrip takeover announced in August.
In macroeconomic news, a robust rebound in workforce participation led to a much stronger than expected 4.6% unemployment print for November. Maintaining its poker face, the RBA once again held fire at its December meeting, leaving the cash rate at 0.10%. Whilst lower inflation and less rampant property on the West Island has bought monetary policy more time across the ditch, the widening difference vs New Zealand’s approach will likely result in some decoupling of fortunes as the better policy path becomes clearer in hindsight.
How many hikes?
December produced a positive return for the month to close out a tough year for local bond market investors. The S&P/NZX Government Bond Index and the S&P/ NZX Investment Grade Corporate Bond Index both recorded gains of 0.5% for the month but are down 6.2% and 4.2% respectively for the year. In Australia, comparable bond indices were marginally positive for the month and also ended the year in negative territory, with the Bloomberg Australian Government Index down 3.3% and Bloomberg Australian Corporate Bond Index down 1.7%. Government bond returns over the year can be viewed against a backdrop of rising bond yields and consequently lower bond prices. In New Zealand, longer term bond yields have moved higher than many developed markets. For example, the 10 year government bond yield ended the year at 2.4%, considerably higher than where it started the year at 1%. The RBNZ is currently ahead of its US and Australian peers, with its interest rate hiking cycle already well under way and more hikes expected over 2022.
During the month, the final US Federal Open Market Committee meeting for the year was the main attraction for global markets. The meeting provided confirmation that the Federal Reserve will accelerate its reduction in asset purchases thus slowing the liquidity that has been supporting US financial assets. Reelected Fed Chairman, Jerome Powell, also signalled that the opportunity to lift interest rates from current lows may come in the first half of 2022. The Fed has now acknowledged that inflation is no longer transitory and has raised its median forecast for US inflation during 2022 to 2.6%. Longer term, the Fed hopes to keep inflation anchored around the 2% mark. The bond market reaction was relative muted with US yields only marginally higher over the course of the month, suggesting the more hawkish position was expected. Central Bank activity will once again be the main driver of returns during 2022 as economies divide into those that are faster or slower to act on higher inflation data. So far New Zealand remains near the front of the pack in the ‘faster’ camp.