May Monthly Market Update
As at end of May 2022
A wild ride to nowhere…
Relatively pedestrian monthly returns for developed market equity indices belied the fact that May was a very tumultuous month. For much of the period, equities remained under heavy selling pressure, weighed down by concerns over high levels of inflation, the war in Ukraine and the potential consequences of the extreme lockdown measures in China. Approaching month end, where the closely followed S&P 500 Index briefly flirted with entering a technical bear market (defined as a peak to trough decline of more than 20%), risk appetite reignited and equities staged a powerful rally, clawing back much of the initial losses. The MSCI World (NZD) Index essentially finished flat with a return of -0.2%. Currency impact this month was negligible, despite the kiwi dollar also experiencing significant swings, in particular against the USD.
There were no specific drivers that clearly explain the month-end rally, as there were no marked improvements to any of the key issues that have caused so much angst for investors this year. Headline inflation prints across most developed markets remained in the high single digits, uncomfortably above central bank targets.
The war in Ukraine continued with no sign of potential resolution, and in China, major commercial hubs remained all but shuttered while cracks in the debtladen property market widened further as a number of major property developers defaulted. Countertrend rallies are common when markets undergo severely depressive episodes, and the fact that the economic and the geopolitical environment did not get progressively worse could have been enough of a catalyst to create some optimism and respite for equities.
Decomposing the returns across the market, the Energy sector continued to outperform on surging oil prices (Brent Crude rose 12.5%) as Europe introduced embargoes on Russian seaborne oil. Far behind Energy, but still delivering respectable returns, were the Utilities and Financials sectors. At the other end of the spectrum, Consumer Discretionary, Staples and Real Estate, sectors that many investors attributed defensive qualities to, saw a sharp sell-off. Notably, a number of major retailers like Walmart and Target saw their share prices collapse by more than 15% due to an unexpected hit in profitability. Consumer spending patterns are seemingly shifting as households navigate rapid financial tightening and the highest inflation in 40 years, sending a bad omen for the economy and the direction of future corporate earnings growth.
NEW ZEALAND MARKET
There were few places to hide during the latest reporting season, as most company results were again overshadowed by overall market movements which saw 41 out of the top 50 companies end with negative returns. A prominent theme across company commentaries has been increasing costs, which have been passed through to customers with varying degrees of success. The S&P/NZX 50 Index significantly underperformed relative to global peers returning -4.8% for the month, and is now down 13.2% year to date.
The top performer in the Index was the church payment and management software company, Pushpay holdings (PPH), which returned 10.6%. It was not all smooth sailing for PPH though, as the share price first took a hit when the company disclosed earnings guidance below estimates before a sharp rebound after revealing early stage discussions with multiple parties on a potential takeover.
The other end of the bourse was more dramatic, with four companies down more than 20% for the month. The market was disappointed by results and slower growth outlooks for small caps Pacific Edge (-21.1%), Eroad (-24.8%) and Serko (-29.0%), with the latter ending as the worst performer in the Index.
Other notable moves were Ryman Healthcare (+8.6%) on the back of a well-received full year result, and a2 Milk (+5.7%), which bounced on anticipation of a potential boost from severe infant formula shortages in the USA. The company announced that it had submitted an application to the US FDA to supply infant formula.
Not easy for Albanese
De-ratings in response to global monetary tightening reverberated through Australia’s equity market in May, driving a -2.6% return for the S&P/ASX 200 Index. Unsurprisingly, sectors where loose policy provided the largest tailwind to valuations were most impacted by the rug-pull; namely Real Estate and IT, which returned -8.9% and -8.7% respectively. Materials was the only sector which managed to eke out a token 0.1% positive return.
Market breadth was weak, with approximately a quarter of the Index’s 200 constituents sustaining price falls of 10% or more, including several ‘blue chips’ such as Woolworths and Goodman Group. Among individual companies, the two worst performers were both hopefuls in the volatile lithium and battery space. Novonix continued its slide from April, slipping a further 21.8%; and AVZ Minerals fell 21.2% in between multiple trading halts over the status of its mining licence in the Congo. On the flipside, the positive standout was biotech Polynovo’s 30% bounce, with a slew of director purchases helping to break the long slump which had seen the company’s shares halve from January peaks.
Australia’s federal election was held this month, with coalition incumbent Scott Morrison ousted and succeeded by Anthony Albanese and the Labor party on a slim governing majority. Interestingly, there was a significant swing of some 6% in the primary vote away from the major parties, in favour of independents and minor parties. These latter look to have picked up 10 seats in Australia’s 151-seat lower house. With bookmaker odds on a Labor win and policy divergence seen as inconsequential, the market reaction was muted. The new government takes the reins amid some trepidation as the RBA embarks on its first hiking cycle since 2009 with a 0.25% rate rise earlier in May.
Moving swiftly along
Bond returns were mixed for the month of May as global bond yields held firm into the next round of central bank policy tightening. Broadly speaking US bonds led while European bonds lagged, with positive and negative returns respectively. The S&P/NZX Investment Grade Corporate Bond Index delivered on the positive side with a return of 0.3%, outperforming NZ government bonds. Across the Tasman, the S&P/ ASX Australian Corporate Bond Index finished down 0.7%, but ahead of Australian government bonds. New Zealand benefitted from being further along in its rate hiking cycle whereas Australian bond markets were vacillating over whether interest rates would move off their lows before or after the Federal election.
Earlier in the month the RBA hiked for the first time since 2009, joining the growing cohort of central banks tightening policy. Whilst Australian inflation has not yet accelerated to levels seen across most developed market peers, the RBA now acknowledges that the country is unlikely to be immune to global inflation drivers. The Fed followed up its March lift-off with a widely expected 0.5% increase to the Fed Funds rate which now sits at 0.75%. Accompanying the move, Chairman Powell’s indication that while multiple hikes are still to come, 0.75% increments are not currently being considered, which was well received by markets.
The RBNZ also hiked 0.5% in May, taking the OCR up to 2%, and upheld its hawkish tone. The bank’s updated OCR track shows a ‘higher and faster’ trajectory for interest rates in order to get inflation under control. The May revision shows the OCR peaking higher and earlier at almost 4% in mid-2023, versus the circa 3.4% peak in late-2023 contemplated in February. With the hiking cycle now well under way, debate has shifted from the path of future rate hikes to the impact a period of higher rates is likely to have on the economy. The big question now is whether anticipated higher rates subdue inflation before or after they hit the economy’s pain threshold.