September Monthly Market Update

As at end of September 2022


Collateral Damage

For the entire year, investors have been contending with a highly uncertain outlook as geopolitical tensions continue to weigh on sentiment and central banks become more assertive in their efforts to rein in high inflation. While the development of this backdrop has been producing historic moves across asset classes and currencies for some time, volatility and fear ratcheted up a notch during September, causing major equity markets to sell off. For example in the US, the S&P500 Index and Nasdaq returned -9.2% and -10.4% respectively. Local returns translated back to NZD were insulated by the remarkable USD rally which saw the NZD depreciate by 8.5%. The currency weakness offset much of the underlying decline in the global stocks, seeing the MSCI World (NZD) Index return -1.7% for the month.

Over the month major global central banks such as the Federal Reserve (Fed) and the European Central Bank (ECB) continued to ramp up their target cash rates in order to subdue inflationary pressures. While the pace of the current hiking cycle has been the fastest in recent history, macroeconomic data continues to show resilience, particularly strong retail spending and tight labour markets. The persistence of stubbornly high inflation suggests the door for further policy tightening remains open, and markets remain wary. Rate hikes and liquidity withdrawal have not only put asset valuations and future growth expectations under pressure, but are now raising concerns about whether something could break in the financial system, potentially instigating a crisis.


The last week of September gave markets a taste of how quickly conditions can deteriorate when something does break, in this case the solvency of UK pension funds. The fiasco began with the UK government announcing a significant and unfunded package of spending and tax breaks, which caused a rapid surge in Gilt yields and a sharp devaluation in the Pound. UK pension funds, many holding leveraged exposure to Gilts (UK government bonds), suddenly met a wave of margin calls demanding collateral in order to maintain funding. The resulting selling in order to raise collateral and the value at risk were substantial enough to cause panic. The Bank of England (BoE) was forced to go into crisis mode and intervene through a short-term £65bn quantitative easing (QE) programme, which saw it commit to buy long-dated Gilts - the complete opposite of plans announced a week earlier to sell them, otherwise known as quantitative tightening (QT). While this particular crisis seems to have been averted for now, investors are likely to remain on edge and continue asking what might be next.


The Urge to Merge

There were few winners in September with only nine companies in the S&P/NZX50 Index managing to make positive returns in a month where the Index returned -4.6%. While this may have hurt local investors, it was still a relative out performance compared to global peers. Domestic macroeconomic conditions were buffeted by more of the same global headwinds, namely recessionary risks, increasing rates and stubborn inflation, with the latter exacerbated by a weaker Kiwi dollar making imports more expensive.

The top performer in the Index was Pacific Edge, which climbed from lows plumbed the previous month to return 11.1%. Potential M&A was an undercurrent for some of the other better performers this month, Tourism holdings (THL +2.9%) and Air New Zealand (AIR +5.1%). While THL received clearance from both the New Zealand and Australian competition regulators for its bid to acquire ASX-listed Apollo Tourism & Leisure, AIR had to refute speculation regarding a potential merger with Virgin Australia. AIR also gave profit guidance ahead of expectations on the back of demand recovering faster than anticipated.


Technology stocks were overrepresented at the bottom end of the market, with Serko, Vista, and Pushpay Holdings returning -11.1%, -11.4% and -14.1% respectively. Church management software provider Pushpay was the month’s worst performer, taking a sharp leg down on media speculation that a mooted takeover may no longer be on cards. For Vista, a decent first-half result delivered at the end of August was not enough to save its share price from the broader thematic sell-off.



September to Remember

Australia’s S&P/ASX 200 Index returned -6.2% in what was a highly tumultuous month for global markets. All sectors declined, with interest rate sensitivity again being the arbiter. Utilities (-13.8%), Property (-13.6%) and IT (-10.6%) were the worst returning sectors, whilst Materials (-2.3%) and Energy (-3.8%) were least scathed.

Podium finishes this month were two coal producers and a Lithium miner. New Hope returned 28.4% and Whitehaven 21.4%, continuing to benefit from stratospheric thermal coal prices as countries scramble to shore up their energy security. Pilbara Minerals rode a different wave, returning 24.9% after auctioning a batch of Lithium concentrate for 10% more than the price realised the month prior.


September’s wooden spoon was on account of a collapsing deal with Link Market Services returning -30.9% after suitor Dye & Durham walked away. Hospital operator Ramsay and auto industry software developer Infomedia (not in the Index) were also derailed, returning -19.3% and -16.7% respectively as deals get reassessed due to market turbulence.

Amidst exceptional volatility in financial markets, currencies are once again in the limelight as policy differences between countries create another layer of uncertainty. The Australian dollar fell 6.5% against the US as a more hawkish tone coupled with QT from the Fed threw down the gauntlet to other countries who are behind the curve on tightening monetary policy. While the weak Aussie dollar helps underwrite Australia’s commodity-driven trade surplus, too much weakness increases the likelihood the RBA will need to raise rates higher than otherwise to avoid importing inflation.



A penny for your thoughts

September featured another round of rate hikes and a bout of selling pressure across the board for risk assets. Relative to the mid-single digit declines from global peers, fixed interest returns in the Antipodes fared better than most in the wake of higher yields, which surpassed the highs reached in June. The S&P/ NZX Investment Grade Corporate Bond Index finished down 1.3%, marginally behind the S&P/ASX Australian Corporate Bond Index which declined 1.2% as credit spreads only started widening late in the month. While investors will struggle to find a silver lining reflecting on absolute returns over the past 12 months, one less tarnished patch were New Zealand corporate bonds, which were down 6.6%, outperforming most other corporate and government bond markets which have seen double-digit falls.

The US Fed followed up their hawkish rhetoric meted out at the Jackson Hole symposium, raising the fed funds rate by 0.75% to 3.25%. The median FOMC member estimate (known as the ‘dot plot’) now shows greater consensus for interest rates to be above 4.6% in 2023. Higher rates for longer seem justified by another hardy headline CPI print of 8.3% y/y, with rising core inflation driven by a surprise jump in services prices. In Australia, the RBA hiked by 0.5% in September and followed up in early October with a 0.25% move to 2.6% after signalling that smaller adjustments may be back in favour at upcoming meetings. New monthly inflation data marked headline CPI in August at 6.8% y/y suggesting that the quarterly print would not be out of kilter with the RBA’s latest estimates.

Quarter-end market volatility spilled over from the UK, triggered by the government proposing what would be the largest tax cuts since the 1970s. This ‘easy’ fiscal policy, which was incongruous with the aims of tight monetary policy, was met with a punishing shift in longer-dated Gilt yields, which rose over 100bp in response to the potential step change in government borrowing requirements. The ensuing shock to the country’s pension sector, which invests heavily in Gilts, prompted the BoE to intervene with temporary QE to stabilise the market and avert a liquidity crisis. The tax package has since been walked back due to political backlash, which saw bond returns and the pound stage a partial recovery. This rapid U-turn in policy does highlight the upcoming challenges for other countries as they attempt to battle inflation and provide support to the economy at the same time.


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