June Monthly Market Update
As at end of June 2021
Global equity markets exhibited strong momentum over the month and continued to edge upwards, with most indices setting new record highs. The MSCI World (NZD) Index made a solid return of 5.7%, however, the bulk of this was due to kiwi dollar weakness rather than appreciation in stock prices (i.e. the NZD fell 3.9% against the USD and 2.6% against the JPY). The US market was the strongest performer, with the S&P 500 Index returning 2.3% as technology, its largest sector, rallied on the back of declining interest rates. Given most of the valuation for technology is derived from far in the future earnings, it tends to be more sensitive to interest rate shifts than other sectors. European equities lagged slightly, with the STOXX Europe 600 Index rising 1.5% and Japan’s Nikkei 225 failing to make a positive return, returning -0.1%.
A feature this month was the decline in long-term bond yields, which had been rising over the year on improving economic conditions and higher inflationary expectations. The move suggests the market may be conforming to the central banks’ view that higher than target inflation will be a short-lived phenomenon due to high levels of spare economic capacity, and that global pent-up demand and supply-chain issues should eventually normalise. Gold futures fell 7.2% and other major raw and intermediate commodity prices such as lumber, steel, and copper also saw substantial pull-backs from last month’s highs. Oil on the other hand continued to rally, reflecting a faster than expected demand recovery and concerns of supply shortages. The WTI crude price rose 10.8% to US$73.5/ barrel, close to its 5-year highs.
NEW ZEALAND MARKET
What goes down...
In a reversal from recent months, New Zealand’s equity market slightly outperformed global peers, as the S&P/ NZX 50 Index returned 2.7%. Year to date, the local bourse has still been a laggard among developed markets, with a -3.3% return over calendar 2021 so far. Two companies who also managed to break their downtrends this month were the a2 Milk Company (ATM: +9.9%) and Synlait Milk (SML: +21.3%), with the latter being top performer in the Index. ATM benefited from a strong ‘618’ sales day event in China and provided some relief that the a2 brand remains strong in the region.
The aged-care sector continues to go from strength to strength as Arvida (ARV: +11.2%), Oceania (OCA: +8.0%) and Summerset (SUM: +7.3%) all delivered solid returns in June, while Ryman (RYM: +1.2%) seemed less in favour with investors due to higher valuations, rising debt levels, and a slower expansion path compared to its peers.
The post-COVID normalisation remains a bumpy ride, with the recent trans-Tasman travel bubble closure and Wellington going into alert level 2 for a few days. As expected after these latest disruptions, entertainment and tourism companies such as Tourism Holdings (THL: -2.3%), Sky City Entertainment (SKC: -2.8%) and Air New Zealand (AIR: -7.2%) fared poorly. AIR ended as the worst performer after confirming a $450m loss for the year and materially downgrading its FY22 profit expectations.
The S&P/ASX 200 Index returned 2.3%, in June, taking its cumulative 2021 return to 12.9% at the halfway mark. IT was the standout sector, returning 13.4% in a month where only Financials posted a modest 0.2% negative return after the banks took a breather.
Best performers this month were the CAD software developer Altium and buy-now-pay-later platform AfterPay. Altium returned 29.8% after it rejected an unsolicited bid from a large US rival, Autodesk. AfterPay rose 27.4%, running up ahead of announcing ‘virtual card’ functionality which will enable its US app users to transact with Amazon and several other large online retailers. On the other side, Nuix’s saga continued, the cyber consultancy taking wooden spoon with a -20.2% return. In the latest chapter, its CEO departed, the CFO was ‘terminated’, and it was revealed ASIC is currently investigating the latter, along with past financial statements and the IPO prospectus.
Lagging economic data show Australia’s recovery continuing apace, with a blistering 5.1% unemployment print for May versus 5.5% expected, and first quarter year-on-year GDP growth of 1.1% versus 0.6% expected. With workforce participation at generational highs, emerging labour shortages, and galloping house prices; underlying trends suggest the RBA may need to tighten policy much sooner than 2024 to avoid overheating the economy. The fly in the ointment is rolling disruption caused by renewed lockdowns in several states which could stay their hand. Like many other developed economies, the risks and distortions of policy error are now becoming increasingly visible.
Flattening the curve
Global bond markets performed well over June, with the Bloomberg Barclays Global Aggregate Index (NZD) rising 0.5%, and nearly all regions and market segments delivering positive returns. This was despite another very strong inflation print from the US, and upgraded GDP growth and inflation forecasts from the Federal Open Market Committee (FOMC). Market expectations for Fed rate hikes have been brought forward, which has led to rising short term bond yields. What has been interesting (and surprising to many) is that longer term bond yields have fallen, and the impact of this has outweighed the rise in shorter term bond yields. In bond market lingo, this is known as a ‘bullish flattening’ of the yield curve. However, it is not necessarily a bullish signal for longer term economic growth or inflation. If investors are willing to buy US 10 year government bonds at a yield or 1.5% or lower, they probably do not think inflation is going to stay above 2% for long, and further may be concerned about the durability of the economic recovery. In either case, current market pricing does not appear to be consistent with the FOMC median projection of 2.5% for the longer term Fed Funds rate.
New Zealand also experienced a similar trend in bond yields but the impact was less pronounced. Part of this is due to the composition of the local bond market (higher weighting towards shorter-term bonds), but also due to continued strength in local economic data. This month it was GDP that surprised on the upside, with 1.6% growth for the June quarter compared to market expectations of 0.5% growth and the RBNZ forecast of a 0.6% contraction. This does increase the chance of a change in communication from the RBNZ – for example they could signal an early end to, or a reduction in their Large Scale Asset Purchasing Program (LSAP), which would likely be a prerequisite to raising the OCR. This month the S&P/ NZX Government Bond Index rose by 0.1%, while the S&P/ NZX Investment Grade Corporate Bond was up by 0.3%.