July Monthly Market Update
As at end of July 2021
NEW ZEALAND MARKET
Lockdowns subdue Kathmandu
The S&P/NZX 50 Index returned -0.5% in July, and is now down 3.8% year to date. This is well behind global peers, such as Australia, the US, UK, and Germany who have generated double digits returns for the year.
There has been limited reprieve for Covid-impacted companies like Air New Zealand (AIR: -3.2%), Tourism Holdings (THL: -7.1%), Sky City Entertainment (SKC: -8.3%) and Kathmandu (KMD: -14.9%) with the latter being the worst performer in the Index. A new wave of infections in populous Australian states triggering lockdowns, and a multi-month closure of the trans- Tasman travel bubble comes in the middle of KMD’s crucial winter trading season.
On the other side of the ledger we had Z Energy (ZEL), which returned +7.7% after a well-received investor day. The company presented its updated long-term fuel demand forecast and strategy to grow non-fuel income, as well as announcing capital management initiatives. Also near the top was Mainfreight (MFT), which returned 7.4% following a strong trading update at the company’s annual shareholders meeting. MFT reported significant revenue and profit growth in the first 17 weeks of the financial year, highlighting higher freight rates as a key factor for the Air & Ocean channel, which saw profit before tax rise by 184%. The top performer in the Index was Restaurant Brands (RBD), which returned 11.5% on no real news flow apart from a solid, but mostly in-line trading update near month end.
At the sector level, listed property was an outperformer, with Vital Healthcare Property, Stride Property Group and Argosy Property rising on speculation that they might be included in the FTSE EPRA/NAREIT Global Real Estate Index. The index has lowered its criteria for inclusion, but the final announcement on changes will not be made until September.
Once again, global equity markets finished the month in positive territory. While sentiment was dampened by increasing proliferation of the Covid-19 Delta variant plus sharply falling bond yields (a sign of declining economic growth and inflationary expectations), it was more than offset by exceptionally strong 2Q21 corporate reporting which helped push equities higher. The MSCI World (NZD) Index delivered a total return of 1.9%, with minimal currency impact on offshore equity returns as the NZD remained little changed.
Across the Developed Markets, US equities led the charge with the S&P 500 Index returning 2.4%, driven by strong performance from the heavyweight IT and Healthcare sectors. Japanese equities lagged as local Covid-19 case numbers surged to all-time highs in the lead up to the Olympic Games. The Nikkei 225 fell 5.2%, dragged down by retailers and telecommunication stocks. In Emerging Markets, Chinese technology stocks were in the regulatory crosshairs once again and sold off sharply. The Chinese cyberspace regulator announced an outright ban on Didi, a ride-hailing app, citing violations of collection and use of personal information. Later in the month it then introduced new regulations on the private education and tutoring sectors, barring them from making profits, raising capital, or going public.
The 2Q21 earnings season is currently underway and so far, the results have been much better than expected. Of the 280 companies in the S&P 500 Index that reported in July, almost 90% of them exceeded analysts’ expectations. A recurring theme from management commentary has been that whilst economic conditions continue to remain very buoyant, rising costs are putting pressure on margins and forcing companies to hike prices. Recent inflation figures across various countries are evidence of this, with many running well above their local central banks’ targets.
While equities have performed very well this year and valuations are high, there is the natural tendency to focus on downside risks such as new virulent Covid-19 strains, accelerating inflation, and potential tightening by central banks. For the moment, an accommodative monetary policy backdrop and strong consumer activity are outweighing these risk factors and supporting equity valuations. However, as earnings growth momentum slows from elevated levels and some of the stimulative measures are wound back, we can expect increased volatility going forward.
Santos turns up the gas
Solid gains from the big miners drove the S&P/ASX 200 Index to a 1.1% return for July. The Materials sector enjoyed a 7.1% return, followed by 4.2% for Industrials. At the other end, IT and Energy were the worst performing sectors, returning -6.9% and -2.5% respectively.
The big theme this month was the continued strength of M&A activity, with oil and gas producer Santos proposing an all-scrip merger with peer Oil Search. A prospective tie-up would create a global top 20 oil exploration and production player worth around A$22bn, and comes in the wake of a communications debacle surrounding the departure of Oil Search’s CEO. M&A was also behind the month’s best performer, Sydney Airport, which returned 34.9%. An indicative proposal, at a 42% premium, was made for Sydney Airport by a consortium of infrastructure investors and subsequently rebuffed by the company. Casino operator Crown was the worst performer, sliding 27.7% as ongoing Royal Commissions fuel concerns over the retention of key gaming licenses.
Another strong set of employment numbers followed on from June’s release, with the unemployment rate declining further from 5.1% to 4.9% on the back of full-time job gains. Headline annual CPI inflation also accelerated markedly to 3.8%. Despite robust data, the RBA left rates unchanged at its August meeting, emphasising ‘underlying’ inflation was closer to 1.75%. The central bank continues to expect a gradual pick-up in wages and ‘underlying’ inflation, with this central case underpinning its unhurried stance on policy tightening.
RBNZ turns off the taps
Global bond markets had another strong month with the Bloomberg Barclays Global Aggregate Index rising 1.2% as long term government bond yields continued to fall. Part of the reason for this has been the worrying trend in global Covid cases, with the Delta variant spreading faster and proving harder to contain than previous strains. Even highly vaccinated countries such as Israel and the United States have experienced surges in the number of positive tests, with genuine concerns that a spike in hospitalisations may follow. This has taken the sheen off optimism about continued strong economic growth in the second half of 2021, especially if easing of restrictions is delayed, or more severe controls get reinstated.
Long term bond yields in New Zealand followed a similar trend downwards, but most of the action was in shorter term yields, which actually rose significantly. The reason for this was a shift in stance from the RBNZ which ended its Large Scale Asset Purchasing Program (LSAP) this month, acknowledging an improving global economic outlook and the build-up of local inflationary pressures. The decision was followed by the release of CPI data that was well ahead of expectations, showing a 3.3% increase in prices in the year to June. While this is actually below many other countries (such as Australia which recorded 3.8% or the US at 5.4%), it was broad-based across product categories, and the economy is running closer to full employment than many of our peers. The case for accommodative monetary policy is waning, and the rapid end to the LSAP paves the way for OCR hikes, which could occur as soon as the next meeting in August. The main concern or pushback to this view is the risk of another Covid outbreak in New Zealand, similar to what is currently occurring in Australia. The low vaccination rate in New Zealand is a cause for concern and is tracking well below most other developed countries.
FUND PERFORMANCE OVERVIEW