December Monthly Market Update
As at end of December 2022
All I wanted for Christmas was positive returns…
There was no reprieve for investors in the final month of what has been a challenging year. Global equities fell sharply, wiping out most of the gains made since October. The MSCI World (NZD) Index fell 6.0% for the month and closed the year with a loss of 11.4% - the steepest calendar year decline since the Global Financial Crisis in 2009. Across major markets, US and Japanese stocks underperformed, with the S&P 500 Index and the Nikkei 225 Index declining 5.8% and 6.5% respectively. The Chinese equity market was the outperformer, with the CSI 300 Index rising 0.6% as sentiment improved sharply due to easing of COVID restrictions and additional stimulus measures being announced for the troubled property sector.
High inflation and aggressive central bank tightening around the world continued to be front of mind for investors. While inflationary readings softened from the multi-decade highs seen earlier in 2022, broadly driven by declining energy costs and easing of supply-chain bottlenecks; demand-based drivers continue to remain stubbornly high. In the US, where the consumer makes up almost 70% of the economy, the labour market continued to be resilient. Both payrolls and employment data releases were above expectations as demand for workers continued to outstrip supply, with approximately 1.7 new jobs being advertised for every available worker. This high level of labour market tightness in the US suggests household demand is unlikely to meaningfully weaken anytime soon. Another factor to weigh on inflationary pressures is the incredible speed at which China has abandoned its pursuit of zero-COVID. As the world’s second largest economy haphazardly embarks on a full reopening after almost three years of draconian restrictions, there is the potential risk that pent-up demand and the pickup in economic activity could once again jolt global supply chains and boost the demand for commodities.
Many of the long-term relationships and trends that investors have become accustomed to have broken down or in some cases reversed during 2022 due to unexpected inflation and the subsequent response by central banks. The events and actions taken over the last year have caused global recessionary risks to become elevated, and the associated earnings risk points to a challenging investment landscape persisting in 2023.
NEW ZEALAND EQUITIES
End of the Eroad
The New Zealand market had a relatively subdued end to another volatile year for global markets, with the S&P/ NZX50 Index outperforming developed market peers, returning -0.7% over the month, seeing it rule off 2022 with a -12.0% return for the year.
The top two performers in the Index were dairy duo Synlait Milk (SML) and a2 Milk (ATM), returning 15.7% and 11.0% respectively. ATM has seen strong demand growth from China as the country begins to reopen after easing COVID restrictions, and SML has had to ramp up production in response, adding extra shifts to keep up with the additional demand. SML also expects production for a new, yet to be named, multinational nutritional customer to commence early in the new year. Spark (SPK) was another outperformer for December, with a 4.9% return, and with a 28.1% annual return, also topping the Index for the year.
2022 has been a year to forget for Eroad (ERD), ending as the worst performer in the Index for both the month and the year. Its share price had fallen more than 80% since January and returned -25.6% in December alone, before being removed from the Index. ERD was replaced by relatively new listed entrant Vulcan Steel (VSL), a processor and distributor of metals, which recently won the company of the year award at the annual Deloitte Top 200 awards. VSL’s share price was flat since inclusion late in the month. The aged care sector had another challenging month on a backdrop of weaker house price sentiment and continued delayed settlements on unit sales. All four listed operators were down more than 5%, with Ryman Healthcare again the worst of the bunch, returning -18.6%. Sky City Entertainment (SKC) found itself in hot water after Australian financial crimes agency AUSTRAC alleged that the company’s Adelaide casino had not complied with anti-money laundering and counter-terrorism financing laws. SKC ended down 14.1%.
A less than jolly December saw the S&P/ASX 200 Index return -3.2%, dragging the calendar year return into the red to the tune of 1.1%. All sub-sectors were down for the month, led by Consumer Staples (-7.0%) and IT (-5.4%), while Materials (-0.9%) was least bad.
Explorer Chalice Mining was the best individual performer this month, returning 18.6% after positive news flow on its polymetallic projects. Second best was miner Champion Iron, which returned 14.9%, closely tracking the 13% rise in A$ Iron ore. Elsewhere, Star Entertainment’s losing streak continued, with the casino operator returning -34.7% as the regulatory pile-on intensified. This month, the Queensland gaming regulator imposed a $100m fine, 90-day operating suspension and a special manager on Star’s Brisbane and Gold Coast casinos; and New South Wales proposed a more punitive tax regime which would impact Star’s Sydney casino if implemented.
Close behind Star was battery materials group Novonix, whose -34.4% December return took its calendar year return to -84.0%, making it 2022’s worst performer. At the other end, 2022’s three best performers were all coal miners, with Whitehaven, New Hope and Coronado delivering returns of 296.8%, 255.5%, and 117.6% respectively. Australia’s coal miners have been at the nexus of a perfect storm: a hostile environment for new investment in fossil-fuel supply, coupled with the Russia- Ukraine driven dislocation in global energy markets. The resulting supply-demand mismatch has seen elevated prices for thermal coal endure, underwriting supernormal profits for the collieries.
2022 was also a dramatic year on the macroeconomic front. Annual CPI inflation exceeded 7%, RBA hikes took the cash rate from 0.1% to 3.0%, the unemployment rate fell from 4.2% to 3.4%, and GDP growth remained positive, assisted by a persistently strong trade surplus. With lagged effects of monetary tightening still yet to fully manifest, the RBA has again chosen a softer approach versus global central bank peers, which lessens downside risk for the economy and housing market in the event it has done enough to quell inflation, but opens up the risk of more aggressive tightening in the coming year if high inflation persists.
Finishing the year on a sour note
Global bond markets were down in December to finish off what has been a rough year for fixed interest investors. It has been a year of rapid increases in both short and long-term interest rates, which was the theme again this month with another round of interest rate hikes from central banks in Europe, Australia, the USA and UK. However, the biggest surprise was from the Bank of Japan (BOJ), not due to a change in rate settings but a subtle change in the implementation of its yield curve control policy. The BOJ is still targeting a 10-year bond yield of “around zero percent” but will now have a higher tolerance range of 0.5% either side of this target. The BOJ is the last remaining holdout on expansionary policy among major central banks, and this change in implementation could be seen as a precursor to abandoning yield curve control altogether. The immediate impact was for 10-year Japanese government bonds to trade at the upper end of this tolerance range, and the impact was felt globally with longer term government bond yields in other markets rising as well.
In New Zealand, government bonds underperformed corporate bonds as the S&P NZX Government Bond Index and S&P NZX Investment Grade Corporate Bond Index declined by 1.5% and 0.7% respectively. Economic data releases were mixed, with a massive upside surprise in Q3 GDP offset by continued weakness in business and consumer confidence surveys, and another fall in the REINZ House Price Index. The NZ Treasury released its Half-Year Economic and Fiscal Update and has joined the RBNZ in forecasting a recession in 2023, with GDP expected to start contracting from the middle of the year. While the contraction is expected to be mild, there is downside risk to these estimates. Much will depend on how the economy reacts to the substantial tightening in monetary policy delivered over 2022 and if this has the desired dampening effect on inflation.