January Monthly Market Update
As at end of January 2022
Devaluation by inflation
It was a rough start to the year as stocks globally suffered steep declines after the Federal Reserve (Fed) confirmed that the days of ultra-easy policy will soon be coming to an end. The Fed’s hawkish pivot reflects plans to counter some of the highest inflation seen in 40 years. Despite the market already being positioned for monetary tightening this year, the signalling from the Fed this month was much more hawkish than expected - suggesting this will likely be a different tightening cycle than what has previously been the case. Reflecting the Fed’s renewed guidance, bond yields surged to post-pandemic highs, making prevailing high equity valuations even more difficult to justify.
For much of the month, stocks generally raced downhill as risk appetite vanished and volatility surged under choppy trading conditions. While headline returns across most major global benchmarks are sizeable losses in the mid to high single digit range, the substantial fall in the NZD against major peers (i.e. -3.7% vs the USD) did help dilute negative offshore returns, and hence why the MSCI World (NZD) Index’s return of -1.3% looks relatively mild in comparison.
Across the various segments of the market, there was significant divergence in fortunes. High-growth technology, media, and biotech stocks, in particular those trading at high valuations, bore the brunt of the selloff. The Nasdaq 100 Index fell 9.0% and saw previous pandemic winners like Netflix and Moderna face spectacular declines, losing more than a third of their market value. The larger and more diversified S&P 500 Index fared slightly better, falling 5.2%. At the other end of the spectrum, energy stocks were seemingly impervious to the wider market decline, with the MSCI Energy Index (USD) returning 15.5% on the back of rising oil prices. Crude oil (WTI) rallied 17.2% to $88.5/barrel, reflecting mounting concerns over future production shortfalls and rising geopolitical risks on speculation that Russia, the world’s third largest oil producer, may be preparing to invade Ukraine as it assembles a large military presence near the border.
NEW ZEALAND MARKET
Nowhere to hide
The New Zealand sharemarket was dragged down by the global equity selloff in January and continued its trend of underperformance versus global peers, with the S&P/NZX 50 Index returning -8.8%. There was almost nowhere to hide as only one company in the Index managed a positive return for the month, while 16 posted double-digit negative returns. Whilst the downturn was widespread, heavyweight Fisher & Paykel Healthcare being down 15.3% had an outsized impact, and was responsible for almost a quarter of the Index’s negative return.
The top performer was Restaurant Brands, returning 5.1%. The company reported that annual sales to December increased by nearly 20% to over NZ$1b, albeit more than half of this increase was driven by acquisitions. The only other company not in the red was Z Energy (ZEL: 0.0%) which finished flat for the month. While ZEL’s acquisition by Ampol still looks on track, it is conditional on Ampol selling its Gull service stations.
Worst performer in the Index was Serko (SKO: -24.3%), which continues to be impacted by a slower than expected rollout by major partner Booking.com amid ongoing travel restrictions. Aside from the general market selloff, sector-specific headwinds of rising interest rates, slowing house price growth, and the latest Covid outbreak saw all the Aged Care providers in the Index down more than 10%, with Ryman Healthcare (RYM: -19.2%) at the bottom of the bunch.
Tech wreck, gravity check
Dancing to the tune of global sentiment, the S&P/ ASX 200 Index returned -6.4% as valuations began to anticipate central banks switching gravity back on. Sectors where valuations had climbed highest under loose monetary policy were the ones that came back down hardest - IT and Healthcare returning -18.4% and -12.1% respectively. By contrast, the more modestly valued Energy and Utilities sectors found favour, returning 7.9% and 2.6% respectively.
Lifted by renewed price strength in the energy complex, these latter sectors yielded four of the index’s top five performers. Whilst Champion Iron (18.6% return) took top spot after a well-received quarterly report, Beach Petroleum (17.5%), AGL (15.6%), Woodside Petroleum (14.3%) and Santos (13.2%) were not far behind. Among the worst performers, ‘story stocks’ with expensive valuations were overrepresented. The most spectacular falls were appbased bookie PointsBet (-31.1%), and niche software developers Megaport and Pro Medicus (both -27.8%).
Monetary policy was again the macroeconomic focus, with data releases on key backward-looking indicators stronger than expected. Unemployment declined to 4.2%, monthly retail sales lifted 7.3%, and headline inflation accelerated to 3.5% annualised. Against this backdrop, the RBA’s extremely accommodative settings appear increasingly untenable, and there is a growing consensus that lift-off in interest rates will need to come sooner rather than later. At time of writing in early February, the RBA have announced an imminent end to QE bond purchases and conceded that a rate hike in 2022 is now ‘plausible.’
Humbled by the peak
In January it was back to the rates rollercoaster for markets, and fixed income was no exception, as global bond yields moved up in response to higher US interest rate expectations. This left the global economy little time to ponder what may be in store for year number three overshadowed by Covid-19. Over the month, New Zealand fared better than Australia with the S&P/NZX Government Bond Index finishing down 0.9% and the Bloomberg Australian Government Index down 1.6%. Corporate bond indices were also negative but to a lesser degree with the S&P/ NZX Investment Grade Corporate Bond Index down 0.6% and Bloomberg Australian Corporate Bond Index down 1%.
The Federal Reserve’s first official meeting in 2022 provided a clear indication that their initial rate hike would be in March this year. Market participants will now be grappling with the pace of the hiking cycle. They will also be looking at future meetings to provide insights on quantitative tightening and on potential adjustments to longer term ‘neutral interest rates’. From the latest round of data, high inflation has not shown signs of relenting and is proving very tricky to forecast. This will certainly keep central banks looking over their shoulders as they withdraw the accommodative monetary policy that has supported markets since the onset of Covid-19.
Here in New Zealand, headline CPI was 5.9% for the year. This has accelerated from 4.9% and was also above the RBNZ forecast of 5.7%, underpinned by strong prints for both the non-tradables and tradables components. Meanwhile, annualised CPI of 3.5% in Australia appears as something of an outlier, however the underlying detail shows this is accelerating on a quarter on quarter basis and was higher than expectations. As the RBA waits for evidence of persistent wage inflation, its preferred core measures are accelerating as well. Looking further afield, US inflation has hit its highest level since 1982, increasing by an annualised 7%; unsurprisingly its core CPI measure is also still accelerating. As the market anticipates a series of interest hikes, central bankers will be uncomfortable with sticky inflation that is arguably yet to peak. The risks of a policy error over the medium term are elevated and the key for central banks will be to remain nimble as they transition to tighter monetary settings.