May Monthly Market Update

As at end of May 2021


Mixed Macro messages

The MSCI World Index (NZD) returned -0.02%, slightly diluted by a rising Kiwi dollar over the month. Strength in European equities was the main driver, with modest contributions from the US and Japan constituents. Recent hype in some commodity futures moderated, notably Lumber, which was down 12.7%. By contrast, Gold performed strongly, rising 7.8% over the month.

Trends in US equity markets were circumspect, with the S&P 500 Index returning 0.7% and the tech-heavy Nasdaq Index declining 1.4% as investors struggled to process the implications of conflicting macro data. On the one hand, non-farm payrolls came in at 266k, falling far short of the 1,000k expected. Whilst this could be a rogue data point, it was also the second biggest miss in history. On the other hand, a monthly CPI print of 0.8% versus expectations of 0.2% was a big upside surprise on inflation, stoking concerns about policy response if overshoots continue.

Whilst both pieces of data can be partly attributed to ‘temporary’ factors such as the spike in used car prices and enhanced unemployment benefits, the reaction belies nervousness about the prospect of policy normalisation being brought forward faster than previously guided. This was particularly evident in growth sector multiples, due to their higher sensitivity to interest rates.

Elsewhere, China’s CSI 300 Index returned 4.2%, brushing off government remarks about bubble risks and its credit impulse turning negative. The latter is a deflationary signal and is seen as a precursor to downward moves in industrial metals and commodity currencies such as the Australian dollar.



The usual suspects

In May the S&P/NZX 50 Index returned -3.2% and was one of the worst performers globally. As seen many times before, the Index was skewed by the usual suspects, as Fisher & Paykel Healthcare (FPH: -17.1%) and a2 Milk (ATM: -23.4%) were the major contributors to the negative return. The woes continue for ATM, ending as the worst performer in the Index after announcing its fourth FY21 earnings guidance downgrade in 8 months. The company noted ongoing issues in the daigou (informal resale) channel selling infant formula into China, and flagged large inventory write-downs to buy back aged stock. By contrast, FPH’s fall came despite reporting a strong FY21 result, owing to the numbers being slightly below market expectations. Management was also not willing to give clear FY22 earnings guidance as the vaccine roll out has seen hospitalisation rates continue to fall in key markets such as the USA.


There was another flurry of management changes in May with C-Suite resignations from Auckland International Airport (AIA: -4.0%), Arvida (ARV: 2.8%) and Synlait Milk (SML: -8.5%) along with the Tiwai Point aluminium smelter’s CEO moving to Mercury Energy (MCY: -5.5%). Kathmandu (KMD: +11.7%) also appointed former CEO of Rip Curl, Michael Daly as its new group CEO and MD. KMD was the top performer in the Index, and is pinning its hopes on the opening of the trans- Tasman travel bubble and a brand revamp supporting sales going into the traditionally strong winter trading period.



A fistful of dollars

Financials drove a 2.3% return for the S&P/ASX200 Index. The sector returned 5.7%, skewed by Commonwealth Bank, which rose 10.8%. By contrast, IT and Utilities fared the worst, returning -9.9% and -6.6% respectively.

Among individual stocks, mid-cap resources were at the top of the tables. Gold miner Resolute delivered a 25.8% return, followed by 23.0% for Whitehaven Coal, propelled by ongoing strength in gold and thermal coal prices. The worst performers were beset by unexpected announcements. Payment card provider EML (-41.9%) revealed its Irish subsidiary was censured by Ireland’s central bank over significant regulatory concerns. Mining contractor Perenti (-38.5%) downgraded FY21 and FY22 expectations, citing a trifecta of disruption impacts, labour pressures, and a stronger AUD. Recently listed cyber analytics group Nuix (-33.1%) continued to be embroiled in controversy, downgrading its revenue guidance for the second time in six weeks.


In macro-economic news, the unemployment rate came in slightly better than expected at 5.5%, albeit this was entirely driven by lower participation, which offset a contraction in employment. Building approvals continued to surprise, with February’s 21.6% growth followed up by a 17.4% print for March. Australia’s Federal Budget was also handed down, with recovery measures including low and middle income tax offsets and extended incentives for capital investment. Aged care and infrastructure were also winners in the bigspending budget, which forecasts a deficit of A$161b in 2021-2022.



Don’t worry, its only transitory

Looking at global bond market returns and yields you would be forgiven for thinking that May was an uneventful month. The Bloomberg Barclays Global Aggregate Index rose by 0.2% with most bond markets delivering positive returns and longer term government bond yields being relatively static. However, there were some interesting data points, the most notable being stronger inflation data in the US. Both the CPI Urban Consumer and the Personal Consumption Expenditure Indices came in higher than expected with annual increases of 4.2% and 3.1% respectively. While these indices have been heavily impacted by swings in commodity prices and the massive supply-side disruption during 2020, they still make for uncomfortable reading. The next few months will paint a clearer picture of whether this is a short term spike or a more persistent underlying trend.

New Zealand bond markets underperformed their global peers with bond yields rising sharply after the release of the Monetary Policy Statement (MPS) from the RBNZ. There was no change in the OCR or any of the other monetary policy settings (as expected), but the MPS included OCR projections out to 2024 which implied a rise in the OCR midway through 2022. While there are a number of caveats around this, the RBNZ is one of the first central banks globally to explicitly forecast tighter monetary policy. This is in stark contrast to the RBA, which still sees interest rate increases as unlikely until 2024 “at the earliest”. This divergence in communication has seen a significant wedge in relative performance between the NZ and Australian bond markets. This month the S&P/NZX Government Bond Index fell by 0.7%, while the Bloomberg Barclays Australian Government Bond Index was up by 0.3%.



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