April Monthly Market Update

As at end of April 2023


Pricing Power

Global equity markets delivered solid gains over April, as data signalled that economic growth continues to remain resilient, despite the headwinds of sharply rising interest rates and tightening financial conditions. The MSCI World (NZD) Index returned 3.1%, with offshore returns aided further by a weaker kiwi dollar, which declined against all G10 currency pairs except the Japanese Yen and the Norwegian Krone. UK equities were the strongest performers with the FTSE 100 Index rising 3.4% (in GBP terms) due to its relative bias towards energy, consumer staples and financials, which were the top performing sectors globally. In China, while there were strong signs the economy was recovering quickly since fully reopening late last year, equities were under pressure and saw a marked pullback. The MSCI China Index ended 5.0% down for the month as geopolitical tensions, and reports of further US export controls, weighed on Chinese equities - particularly communication services and consumer discretionary stocks.

In the US, business activity as measured by flash PMI manufacturing and services indicators, showed surprising improvement and increasing momentum. There were also signs the red-hot labour market was cooling, a factor likely to be welcomed by the Federal Reserve (Fed) as it is considered to be one of the key drivers of inflation. While the unemployment rate remains at a historical low of 3.5%, wage growth is on a downward track, slowing to 4.2% year-on-year, and the number of job openings continues to normalise towards pre-pandemic levels. The dynamics in Europe were mixed with manufacturing activity continuing to see contraction whereas the services segment of the economy remained strong.

The global corporate reporting season did help lift spirits slightly, with quarterly earnings results coming in much better than expected. Concern over persistent inflation was seen as one of the main risks, however a range of companies such as Nestle and Procter & Gamble demonstrated their pricing power by being able to pass through higher costs and sustain profit margins. Heavyweight IT companies, such as Microsoft, Alphabet, and Meta, also delivered strong core operating performance and highlighted demand for cloud-computing and online ads remains resilient. However, while more than 80% of US companies that reported their results managed to beat consensus estimates, share price reactions to the positive results were broadly muted. Potentially a sign of investor exhaustion likely driven by the strong year to date rally, alongside elevated valuations, deteriorating fundamentals, and cautious management commentary on outlook.


Sin Lait

The local market continued its recent trend of underperformance versus global peers as the S&P/NZX 50 Index returned 1.1% for the month, which coincidently also brings the 12 month return to the same 1.1%.

For a second consecutive month, Synlait Milk (SML) was the worst performer in the Index, returning -24.4%. SML went into a trading halt late in the month before announcing a second earnings downgrade in as many months, alongside temporary relief on some of its debt covenants. Most of the downgrade was again related to weaker than expected demand from its largest customer, a2 Milk (ATM). ATM responded with its own market update, noting another modest downgrade to its FY23 volume and revenue outlook.

There were mixed fortunes in the aged care sector as Summerset returned -7.5% following weaker than expected March quarter sales numbers, while Arvida (ARV) reported a solid end to the financial year and was the top performer in the Index with an 11.8% return. ARV also recently managed to amend its bank covenants to include development earnings in its Interest Coverage Ratio (ICR) calculation and got the ICR covenant loosened until Sep-24. Negative sentiment featured for small cap software companies Serko and Vista, which returned -12.1% and -11.5% respectively on little news flow, while biomedical tech company Pacific Edge bucked the trend to return 8.1%. This performance was on the back of a well-received update on testing volumes and progress on its project to integrate Cxbladder, its key product, into health provider Kaiser Permanente’s medical records system.



The benchmark S&P/ASX 200 Index returned 1.8% for April, with all sectors bar Materials (-2.6%) delivering positive returns. Property (+5.3%) and IT (+4.8%) were the strongest sector performers, with a common underlying theme of valuations being buoyed by market expectations that the RBA’s hiking cycle had peaked.

Among individual companies, material outperformers were oncology biotech Telix (+47.1%), connectivity software developer Megaport (+36.7%), and supplement manufacturer Blackmores (+35.0%). Telix was boosted by a strong quarterly trading update, which showed sales of its ‘Illuccix’ cancer imaging kits ramping up faster than expected. Megaport surged after flanking its quarterly with an upgrade to one- and two-year earnings guidance, and Blackmores lifted after announcing it had signed a takeover scheme deed with Japanese brewing giant Kirin. At the other end, graphite miner Syrah (-37.1%) and AI hardware developer Brainchip (-14.7%) were the biggest underperformers, with both companies manifesting negative operating cashflow in their quarterly report announcements.

An April pause by the RBA on its rate hiking cycle was taken by some participants as an indication that rates may have peaked. While this position was redressed in early May, it does highlight the dilemma presently facing the RBA in context of robust aggregate spending and a historically tight labour market. Namely that with inflation still uncomfortably high and some parts of the economy such as construction showing signs of stress, the window to ‘thread the needle’ is narrower. Put another way, with rates now much closer to the pain threshold, there is sharper sensitivity to any further rate increases and so the bank will need to tread carefully.


No cause for a pause

A measure of calm was restored to global markets during April, as deposit outflows for US regional banks moderated following intense pressure in reaction to the demise of SVB Bank in March. Bond yields remained relatively subdued, and volatility measures fell back as Easter holidays contributed to a less eventful month. New Zealand bond markets finished ahead of developed market peers, supported by inflation data signalling the rate of increase may be on its way down. The S&P/NZX New Zealand Government Bond Index delivered +1.1%, closely followed by the S&P/NZX Investment Grade Corporate Bond Index which was up 0.8%.

Local events were headlined by the RBNZ’s OCR hike of 0.5% which wrong-footed most market participants. The OCR now stands at 5.25%, a full 5% higher over the past 18 months. The main motivation behind maintaining the cadence of outsized moves was to keep wholesale bank lending rates high and thus maintain pressure on borrowers. As one of the first central banks to raise rates, market pricing is starting to look past peak interest rates for indications of when rate cuts might begin. On the inflation front, New Zealand CPI for Q1 came in lower than anticipated at 6.7% y/y. The surprise element was lower imported inflation (tradeables) which tracked the global disinflationary trend in goods. Although this is an encouraging signal in the fight against persistent inflation, it is still early days yet.

Across the Tasman, inflation measures also continued to track lower with headline CPI printing 7% y/y in Q1. Consequently, the RBA adopted a more dovish ‘waitand- see’ approach leaving rates unchanged at 3.6% at their latest monetary policy meeting. Markets now have some evidence that inflation has likely peaked, albeit further validation will be required before central banks can ease up on restrictive policy settings.



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