April Monthly Market Update
As at end of April 2022
Bond market tumult once again awakens the bears
It was a volatile and difficult month for Global equities, with the war in Ukraine, a mixed start to quarterly earnings season, and the prospect of more aggressive policy tightening by the US Federal Reserve (Fed) weighing on risk sentiment. While offshore equities saw steep losses, the returns translated back to kiwi dollars were significantly better due to the substantial decline of the kiwi dollar, which declined 7% against the USD. The MSCI World (NZD) Index fell 1.7%, whereas the local currency equivalent Index was down 6.9%.
The upheaval in equity markets was largely related to rapidly rising bond yields, reflecting increasing concern that central banks will need to be more aggressive in order to prevent inflation expectations from becoming embedded. The US headline inflation reading for March came in at 8.5% y/y, the highest level since 1981 and significantly higher than the Fed’s long-term target of 2%. In response, a number of Fed members, including Fed Chair Jerome Powell, indicated that a more aggressive path of future interest rates hikes is now more likely, which caused bond yields to trade higher.
One of the effects of rising bond yields is the downward pressure they exert on equity valuations, an effect which tends to be more pronounced on expensive and high growth stocks. The tech-heavy NASDAQ Index is an example of this, where the brutal sell-off in some of the most popular IT and media stocks caused the Index to fall 13.2% - the largest monthly decline since 2008 during the throes of the global financial crisis. In comparison, the S&P 500 Index, which is a broader representation of the US market, fared slightly better but still sustained a heavy loss of 8.7%. The start of the quarterly earnings reporting cycle also did not help lift sentiment. While forward-looking guidance has generally been more on the cautious side due to rising cost pressures and uncertainties surrounding the war in Ukraine, the panic-like selling in widely-held large companies, such as Amazon (-23.8%) and Netflix (-49.1%), demonstrates the underlying nervousness currently gripping markets.
NEW ZEALAND MARKET
Offerings for Pushpay
Macro trends, including inflation and rising interest rates were the overarching drivers of market moves in April. Whilst the local market held up better than some global peers, the S&P/NZX 50 Index was still down 1.9% for the month, taking its year to date return to -8.8%.
For the second month running, the top performer in the Index was church payment and management software developer, Pushpay which returned 15.8% after disclosing it had received unsolicited takeover interest from more than one party. Close behind was Air New Zealand (AIR), which returned 12.0% for the month. AIR managed to gain some altitude following a hard landing in March after supplying more detail on the allocation of the $2.2 billion recapitalisation proceeds and adding additional capacity on trans- Tasman routes.
Transport fleet data company Eroad was the worst performer, returning -28.3% after the company announced that founder Steven Newman had resigned from the board and would step down as CEO. Other big movers for the month included Fisher & Paykel Healthcare (FPH: -11.7%), The a2 Milk company (ATM: -12.8%) and Fonterra (FSF: -16.4%). FPH continued to battle post-pandemic headwinds, while ATM was dealing with an increasingly opaque outlook for Chinese infant formula sales. The FSF share price was impacted as debate reignited over its controversial proposed capital restructure.
Feeling their Oats
The S&P/ASX 200 Index outperformed developed market peers, returning -0.9% over the month. In a reversal of March fortunes, IT went from best to worst sector with a -10.4% return, echoing negative sentiment towards technology and software stocks in the US on the back of rising interest rates. Incidentally, Computershare, a beneficiary of rising rates, was the only constituent in the IT sector with a positive return. Utilities was the best performing sector with a 9.3% return for April.
Best individual performers were private hospital operator Ramsay and grain handler Graincorp. Ramsay returned 24.5% on a buyout proposal from private equity fund KKR; and Graincorp returned 21.6% after upgrading its earnings guidance by over 20%. The latter has been a significant beneficiary of recent grain market volatility and strong crop harvests on Australia’s East coast. On the flipside, poorly received trading updates triggered the two worst performers - gift card operator EML Payments and connectivity software developer Megaport, which returned -46.8% and -37.6% respectively.
Australian headline CPI inflation came in above expectations, accelerating to a 5.1% annual clip versus 4.6% expected; whilst the 4.0% unemployment rate remained around historic lows. With inflation now uncomfortably high, interest rate markets have priced in a long belated lift-off from the RBA in May, anticipating a small hike. Whilst rate rises during an election campaign have been a historical rarity, there is a unique impetus given how far behind the curve markets think the RBA is. For context, market pricing has the equivalent of ten 0.25% hikes to the cash rate baked in by the end of 2022.
Flipping to 50
There was little reprieve for bond markets heading into the second quarter as rising yields and volatility persisted, with 10 year government bond yields in New Zealand and Australia reaching 3.7% and 3.2% respectively. Government bond returns were correspondingly negative, with the S&P/ASX Australian Government Bond Index down 1.7%, faring slightly better than the S&P/NZX Government Bond Index which was down 2.4%. Both antipodeans outperformed US Treasuries. Corporate bond indices also came under pressure, with both the S&P/NZX Investment Grade Corporate Bond Index and the S&P/ASX Australian Corporate Bond Index finishing down 1.6%, faring better than global peers as credit spreads moved wider. Volatility was spurred by multiple FOMC member comments supporting 0.5% moves in the Fed Funds rate following an initial hike of 0.25% in March. Effectively, the bond market now acknowledges that higher yields delivered through 0.5% moves in cash rates is a likely starting point for most upcoming central bank meetings. These more hawkish expectations were reinforced by another high US inflation print (8.5% y/y).
Here in New Zealand, the RBNZ showed its preference to pull forward planned rate hikes by raising the OCR by a 0.5% increment to 1.5% during the month, whilst leaving its expected terminal OCR unchanged at 3.5%. This indicates that while the RBNZ is clearly concerned about high inflation (first quarter CPI coming in at 6.9% y/y), it does not currently see significant danger of a prolonged bout of it. The RBNZ indicated that it expects inflation to peak before the halfway mark of 2022, albeit calling the top of the inflation cycle has proved a difficult task for most forecasters thus far. Looking across to Australia, despite earlier resistance to raising rates, accelerating inflation (first quarter CPI to 5.1% y/y from 3.5% previously) is now putting pressure on the RBA to play catch-up with the global hiking cycle.