March Monthly Market Update
As at end of March 2022
Stocks defy global unease
Global equity markets whipsawed as the Russian invasion of Ukraine escalated further and concerns over rising inflationary pressures continued to mount. Initially, equity markets seemed to be stuck in a downward spiral, continuing to slide as they have been for much of the year, where at one point the MSCI World (NZD) Index was down almost 7% for the month. From mid-month onwards risk sentiment reversed, however, with the ensuing rally seeing the MSCI World (NZD) Index pare its losses to finish flat.
Unusually, there were a lack of positive developments to help explain the snapback rally, aside from technical indicators suggesting over-sold conditions and clearing of short positions. In fact, the prognosis on key investor concerns, such as consequences from the conflict in Ukraine and the persistence of high inflation, deteriorated. Despite the Russian invasion seemingly stalling, conflict continues to rage as diplomatic attempts fail and the West continues to ratchet up sanctions against Russia.
Commodity prices have seen a significant uplift and are expected to remain elevated, at least until a peaceful resolution is found. This has caused the market to reprice future inflation globally. In the US, consumer prices are increasing at their fastest rate in 40 years, far outpacing wage growth.
This puts central banks in a bit of a quandary. While their main tool for combatting inflation is higher short-term interest rates, the impetus to hike comes at a time when economic growth is being hampered by higher commodity prices and a debt-laden world still dealing with aftereffects of the pandemic - factors which central banks cannot directly control or influence. One of the closely followed recessionary signals (i.e. when the difference between the 10-Year and the 2-Year US Treasury yields becomes negative) flashed red for the first time post the pandemic recovery. While not an imminent threat, it is an ominous signal suggesting days of buoyant market conditions may now be behind us.
NEW ZEALAND MARKET
Up, up and a raise
With sharemarkets continuing to recover from a rocky start to the year, the local bourse could not quite keep up with global peers in March, with the S&P/NZX 50 Index returning 1.1% for the month and -7.1% for the quarter. Macro worries (Ukraine war, rising rates, inflation) seemed to take a back seat for New Zealand equities, with only 12 of the 50 companies in the Index finishing March in the red.
The top performer in the Index was church payment and management software company, Pushpay Holdings, returning 22.6% after narrowing its earnings guidance. The company also noted solid cash flow and significantly reduced debt levels. Some uplifting news for tourism companies came when the Government announced an earlier opening of borders for certain groups. Key beneficiaries of this news, Auckland Airport (AIA: +10.0%) and Tourism Holdings (THL: +9.2%) finished near the top of the Index. By contrast, the positive reopening outlook was overshadowed by company specific news for the month’s worst performer, Air New Zealand (AIR: -13.7%). AIR started the month with cabin crews striking over a wage dispute and ended by launching a significantly discounted NZ$2.2b recapitalisation package. Not far behind was Fisher & Paykel Healthcare (FPH: -11.5%), which fell after providing revenue guidance lower than analyst expectations. Vaccines combined with the less severe Omicron variant and a relatively mild Northern hemisphere flu season have seen lower intensive care hospitalisation rates and proved to be a headwind for the company’s sales.
Rolling the Pork Barrel
Commodity prices helped fuel the S&P/ASX 200 index to a 6.9% return in March, well ahead of most developed market peers. Strong performances from the Energy (+9.8%) and Materials (+8.9%) sectors were unquestionably driven by Russia/Ukraine related supply concerns and significant price rises across most of the commodity complex. Less intuitively, the best performing sector was IT (+13.2%), given rising interest rates are traditionally seen as a headwind for technology company valuations.
Among individual companies, Lithium hopeful AVZ Minerals and small cap telco Uniti Wireless were top of the charts, returning 56.3% and 43.8% respectively. AVZ, newly admitted to the S&P/ASX 200 Index, soared post-inclusion on the wings of the continued rally in Lithium prices. Uniti rose after it announced a $4.50 per share takeover proposal from Morrison & Co, later upped to $5.00 following a competing proposal from Macquarie.
At the other end, buy-now, pay-later operator Zip, and Nickel Mines were the worst performers, returning -32.8% and -17.0% respectively. Zip came undone after announcing its results, the acquisition of US-focussed peer Sezzle and capital raising simultaneously. Nickel mines was issued a ‘please explain’ by the ASX after being drawn into fear surrounding offtake partner Tsingshan’s LME margin call fiasco.
With cost of living pressures taking the limelight globally, Australia’s pre-election budget gave further signs of things to come. In addition to A$3b on halving fuel excise for six months, cost of living relief such cash handouts also featured, as did big-ticket spending on infrastructure projects and cybersecurity. Overall, stronger commodity prices helped drive a lower deficit outcome and a better revenue outlook reduced deficits projected in future years. Reliance on deficit spending to support the economy is likely to continue for some time, with payments still expected to exceed receipts for at least another decade.
March saw an end to a torrid quarter delivering another month of negative returns across the board for bond markets as bond yields continued to rise. The silver lining continues to be New Zealand outperforming its global peers across both corporate and government bonds. The S&P/NZX Investment Grade Corporate Bond Index was down 1.6%, faring better than the Australian Corporate Bond Index (-3.4%) and the US Corporate Bond Index (-2.5%). In the government bond space, the S&P/NZX Government Bond Index was -2.5% for the month, ahead of the Australian Government Index (-4.4%). Bond yields in Australia moved up more than in New Zealand over the month, leading to a larger price decline for Australian bonds.
Central bank actions were broadly anticipated over the month, with the market paying greater attention to the commentary accompanying each meeting. The Federal Reserve took centre stage when it officially joined the global hiking cycle with a 0.25% lift to the Fed Funds rate. March also saw 0.25% hikes delivered by both the Bank of England and Bank of Canada. Market participants are now grappling with how high and how fast rates could go as some members of the FOMC emphasise their preference for front-loaded 0.50% hikes at future meetings. Locally, we have heard similar rhetoric from the RBNZ, so this should not be a big surprise to bond investors. As it stands, most central bank have demonstrated they are reluctant to allow higher inflation expectations to become entrenched, and have not been dissuaded by the ongoing conflict between Russia and the Ukraine.
The RBA remains the odd one out in the Anglosphere, resolute in its belief it can remain patient and does not need to join the global hiking cycle just yet. The Australian Federal Budget, released later in the month, forecasts inflation to peak above 4%, which is marginally ahead of the RBA’s estimate, but still at the low end of the spectrum relative to developed markets. Australia’s low unemployment rate is also not yet having observable knock-on effects on wage inflation and broader inflation expectations. The underperformance in Australian bonds implies that these may eventually prove difficult to contain and that Governor Lowe’s narrative on interest rates may soon need pivot hawkish.