January Monthly Market Update
As at end of January 2021
After a very strong run late last year, global equities eased off slightly in January. Developed markets ended slightly lower, with the MSCI World (NZD) Index returning -1.1%. Emerging markets on the other hand registered gains as the ongoing global economic recovery continued to improve sentiment. The MSCI Emerging Markets Index rose 3.1%, largely driven by the strong performance across Asian equities. Unlike the previous few months, which saw the NZD strengthen considerably, currency shifts had less of an impact on offshore returns this month as the NZD remained broadly range bound.
January was marked by a surge in trading activity and violent price swings in certain small US companies that contained high levels of short interest (meaning there was substantial investor positioning for further price declines). Prices of these companies initially soared to baffling levels, raising concerns of bubblelike speculative behaviour. While this was primarily concentrated amongst a handful of US stocks, it did have the impact of dampening risk sentiment across the broader market. The S&P 500 Index returned -1.0%, dragged down by industrial and consumer staples stocks. Energy was the top performing sector, not only in the US but also globally. Oil prices rallied 7.6% over the month as Saudi Arabia, made an unexpected announcement it would unilaterally make substantial production cuts. Eurozone equities also declined, with vaccine roll-out delays dominating news flow. While the UK and US have administered 11 and 8 doses per 100 people, Germany, Italy and France have lagged, administering less than 3 per 100 people. Political instability in Italy erupted once again, this time over COVID relief spending, which led to the resignation of the Prime Minister. On a relative basis, Japanese equities outperformed and broke into new record highs, with the Nikkei 225 eking out total return of 0.8%.
NEW ZEALAND MARKET
Energy takes the spotlight
A bumpy start to the New Year saw the S&P/NZX 50 Index managed a 0.3% return for the month. Even as the New Year brings hope in the form of vaccines, it may still be some time before border restrictions are fully lifted. The lasting effects of COVID are still being felt by tourism and entertainment stocks, SKY City Entertainment (SKC, -5.0%), Vista Group International (VGL, -11.3%), Air New Zealand (AIR, -11.7%) and Tourism Holdings (THL, -13.5%) with the latter being the worst performer in the Index.
The energy sector has been in the spotlight recently, starting with dramatic share price volatility for Meridian Energy (MEL, -3.6%) and Contact Energy (CEN, -8.3%) after clean energy ETFs saw massive inflows, anticipating less obstruction of President Biden’s renewable energy policies. The next catalyst for MEL and CEN came as Rio Tinto announced it agreed to continue operating NZAS until at least 31 December 2024 at lower electricity prices, impacting the near term earnings forecasts for both companies. For the rest of the sector however, this was very positive, as the large amount of supply taken up by the smelter will help to maintain higher wholesale and retail prices. Genesis Energy (GNE, +8.1%), Mercury Energy (MCY, +9.1%) and Trustpower (TPW, +10.1%) all ended near the top of the Index. The top performer was Heartland (HGH), returning 12.0% for the month, benefitting from sentiment around a faster than expected recovery for small business.
Payment Traces lift Trading Places
Whilst the S&P/ASX200 index eked out a muted 0.3% return in January, fortunes varied considerably between sectors. Real Estate was the worst performing, returning -4.4% as sentiment around long rates cast a shadow over valuation prospects. Consumer Discretionary was the standout, returning +4.7% after a raft of positive trading updates from retailers.
The common theme in several of these updates was strong sales growth magnified into even stronger profit growth. With trailing benefits from wage subsidies and rent abatements in their cost bases, many retailers are enjoying enhanced operating leverage on a spike in their revenues. The extent to which this spike is being driven by temporary factors (‘pent-up demand’, substitution, pandemic savings buffer being spent) will be an important focus in forthcoming half-year results.
Among individual stocks, buy-now pay-later outfit Zip (+37.4%) and waste collector Bingo (+32.4%) delivered the strongest returns. Zip rose after an oversubscribed capital raise and positive trading update, whilst Bingo confirmed media speculation of a takeover approach. The two worst performers were both biotechs. Polynovo (-32.2%) gave a weak trading update which was queried by the exchange in connection with director share sales; and Nanosonics (-14.8%) ceded some ground after returning 20.6% in December.
Macroeconomic releases were largely uneventful, with a robust November trade balance of A$6.4b, and quarterly inflation of 0.9%, ahead of expectations at 0.7%. Despite ongoing positive data, the RBA doubleddown on accommodation in early February, extending its QE program sooner than expected and raising the bar for future rate hikes. The trigger condition was pushed from full employment to labour market tightness, something it does not expect to see until at least 2024.
Back above one percent
January saw rising bond yields in most regions and the Bloomberg Barclays Global Aggregate (NZD) Index returned -0.6% as a result. It was notable to see the 10 year government bond yield rising above 1% in New Zealand, Australia, and the US. While these yields remain very low by historical standards, they are a lot higher than where they were only a few months ago, and this is occurring despite very aggressive bond purchasing programs in these countries. The short term global economic outlook remains dire but there is a high level of optimism relating to the success of vaccines and a return to a more normal way of life later this year. If this were to occur then it would be logical to expect less accommodative monetary policy and further rises in bond yields.
Local bond markets also had negative returns with the S&P NZX Investment Grade Corporate Bond Index falling by 0.2% and the S&P NZX Government Bond Index by 0.5%. In New Zealand, the recent run of economic data remains positive, particularly from the residential property market but also across business confidence surveys and several other indicators. This month it was CPI data that came in higher than expected with annual headline inflation running at 1.4%. While this is still at the low end of the RBNZ target range, it was higher than the RBNZ forecast of 1.1%. There were a few one-off items that the RBNZ will undoubtedly look through but if inflation tracks upwards from here and employment markets continue to recover, there will need to be a rethink of current policy settings.