November Monthly Market Update
As at end of November 2021
Bears aren’t hibernating just yet.
The momentum from October’s rally faded with many major markets around the world finishing in negative territory for November. Market sentiment soured primarily due to COVID related news flow concerning higher hospitalisation rates in parts of Europe, renewed restrictions on activity, and the heavily mutated ’Omicron’ strain being designated a variant of concern by the WHO. In addition, investors had to contend with a more hawkish Federal Reserve (Fed), with Chairman Powell indicating it was probably time to retire the widely disputed “transitory” term for describing inflation, and that the central bank is now open to a faster taper of its asset purchasing programme. Currency impact was a major factor driving returns this month given the substantial fall of the kiwi dollar versus its major peers. The NZD Trade Weighted Index fell 3.5%, and explains why the currency-adjusted MSCI World (NZD) Index returned a positive 3.1% when offshore headline returns were negative.
Global sector performance was mixed, with Energy leading the decline as oil prices fell more than 20% on rising concerns over how much new COVID related restrictions and Omicron may impact the demand for oil. IT and Consumer Discretionary were the top performing sectors, and the only ones to deliver positive returns. Economic data releases across developed markets were generally positive, particularly in the US. The US labour market continued to improve as unemployment fell to 4.6%, which is only about a percentage point higher than pre-COVID lows. This was also evidenced by solid wage growth, continuing strength in retail sales, and high levels of industrial activity. However, the flipside has been higher inflation, with the combination of elevated consumer demand and ongoing supply constraints driving prices higher. The US Consumer Price Index rose 6.2% for October, its highest reading in more than 30 years and significantly higher than economists’ forecasts. Persistently high inflation is a key near-term risk for equity markets. It may force central banks to be more aggressive in withdrawing stimulus and start monetary tightening; thereby dampening demand and putting corporate profit margins at risk.
NEW ZEALAND MARKET
Nowhere to hide.
It was another eventful month in the New Zealand market with lockdowns finally coming to an end and another OCR hike. The S&P/NZX 50 Index continued to underperform most global peers, returning -2.9% for the month, which tipped the Index return once again into negative territory year-to-date. The pain was felt across the board with 41 companies finishing in the red, the worst performer by a wide margin being Pushpay (PPH), which returned -28.4%. This came on the back of a relatively weak half year result and downgraded growth outlook. Other poor performers were Serko (SKO: -17.9%) and Pacific Edge (PEB: -16.3%). PEB also disappointed in its half year result, while the sharp decline for SKO was sparked by the announcement of a discounted capital raising.
Only two companies in the Index managed to return more than 5% for the month; Fisher & Paykel Healthcare (FPH: 6.8%) and Chorus (CNU: 5.0%). FPH reported half year profits above expectations with continuing waves of COVID in the Northern hemisphere propping up demand for its hardware and consumables, plus uncertainty regarding the new Omicron variant proving to be a tailwind for the company. Chorus on the other hand had no major news flow, but investors are anticipating greater certainty from the regulator on how much revenue the company is allowed to earn on its network assets.
Home Loan Blues.
A weak result and trading update from two of Australia’s big 4 banks dragged the benchmark S&P/ASX200 Index to a -0.5% return for November. Westpac and Commonwealth Bank, whose loan books are more consumer-heavy than ANZ and NAB, returned -17% and -11% respectively. This resulted in Financials (-6.9%) being the second worst performing sector, after Energy with a -8.3% return. Materials and Telecommunications fared best, returning 6.3% and 5.2% respectively.
Among individual companies, junior miners Chalice (+49.5%) and Nickel Mines (35.9%) were the best performers, both riding waves of positive project announcements, which included Chalice’s discovery of new Palladium-rich mineralisation. The worst performers were both in the software and technology space. Tyro (payment terminals) and NearMap (aerial imaging) returned -28.7% and -27.6% respectively on the back of AGM updates that were negatively received.
Against a relatively benign backdrop of macroeconomic releases, Australia’s banking sector drew renewed focus in November. Beyond Westpac’s weak full year result and Commonwealth’s trading update both evidencing margin pressure driven by competition in mortgages, tighter macroprudential regulation also weighed on sentiment. Following October’s directive by the banking regulator APRA to lift mortgage serviceability buffers, the body also announced early December that it had finalised capital requirements for large banks due to be implemented in 2026. Whilst these were at the less onerous end of earlier guidance, all roads are increasingly pointing to a more difficult environment for banks, as tightening and regulation start to bring credit growth off the boil, and competition eats into margins.
Steady as she goes.
November saw some reprieve for fixed income investors as bond markets clawed back a positive return for the month. This breaks a run of weak monthly returns across Australasian fixed income markets, driven by rising bond yields in anticipation of tighter monetary policy. In New Zealand, the S&P/ NZX Investment Grade Corporate Bond Index delivered 0.4%. The S&P/NZX Government Bond Index fared better with a 1% return over the month, however this has only slightly improved 1 year rolling returns, which still show a 7.5% decline. Over in Australia, returns for the period were ahead of New Zealand, also following a similar pattern with government bonds outperforming corporates.
So what was different in November? One of the driving factors behind returns was a more dovish than expected Monetary Policy Statement from the RBNZ. Sentiment for bond yields proved to be better than anticipated as shorter dated securities had positioned for potentially more aggressive hikes in cash rates. In summary, the RBNZ continued on its path to a higher neutral rate by raising the OCR to 0.75%, which relieved some pressure on short term rates. The bank was consistent in its “steady increases” messaging by delivering a 0.25% increase to the OCR despite some calling for a 0.50% hike. For now, the market will continue to appraise the pace and size of future hikes against updated central bank forecasts.
Inflation in New Zealand is estimated to peak at 5.7% in early 2022 and then trend back to the target midpoint of 2% by 2024. Alongside this, the RBNZ’s revised neutral interest rate is expected to climb to 2.6% by the end of 2023. This is in contrast to the RBA’s view that Australia’s inflation peak will be lower and therefore the need to raise rates is less pressing. A further contributor to lower yields was the designation of the Omicron strain of COVID towards the end of the month. Central banks globally are beginning to acknowledge that inflation is expected to be more persistent, which means that higher cash rates are likely to follow. If this is the case, volatility for bonds may hang around for a while yet.