January Monthly Market Update
As at end of January 2023
After last year’s dismal performance, global equities started off the new year on a much more optimistic note. The MSCI World (NZD) Index delivered a solid return of 4.8% in January, despite being slightly hampered by USD weakness offsetting the gains from US equities. The dramatic change in risk sentiment was predominantly led by diminishing inflationary headwinds. Various macroeconomic data releases continued to demonstrate inflationary pressures are abating, which had the effect of fading out the interest rate overhang that had severely impacted vast parts of the equity market last year, in particular high growth technology stocks.
Across the US and the Eurozone, weaker consumer price index prints continued to support the disinflation narrative and helped fuel hopes that the current hiking cycle may be coming to an end. US wages, a closely monitored metric by the US Federal Reserve (Fed), also reinforced this view, with wage growth data remaining on a downward trend. Declining oil prices, weaker housing activity, and benign manufacturing inflation were taken as other indications that inflation is on track towards normalisation. However, somewhat curiously, there was also a noticeable pull-back in recessionary fears. As inflationary expectations moderated, bond yields globally retraced, effectively easing financial conditions. Combined with continued strength in labour markets as unemployment levels across the world remain very low, China reopening and Europe managing to avoid a severe recession thanks to a mild winter, the “soft-landing” scenario increasingly became a prospect too hard to ignore.
This shift in prevailing headwinds effectively resulted in a sudden rotation in momentum, where those stocks that were the worst performers last year generally happened to be the best performers in January and vice versa. Cyclical and interest rate sensitive sectors such as IT and Consumer Discretionary, which were the worst performers last year were the best performers in January. Meanwhile defensive sectors such as Healthcare and Utilities which significantly outperformed the market during last year’s rout, struggled to keep up and make positive returns. While going long last year’s losers and shorting the winners may have been a very effective investment strategy over the month, another method of beating the market would have been to play the layoffs game. It appears announcements of mass layoffs have become a popular tool to help boost share prices, in particular within the “Big Tech” segment, which has faced criticism for over-resourcing during the pandemic liquidity frenzy. Among others, behemoths such as Alphabet, Microsoft and Amazon have all seen positive price reactions to announcements of mass layoffs. This likely reflects investor concerns about the deteriorating macroeconomic backdrop being allayed by management teams finally beginning to prioritise cost efficiencies and preservation of profit margins.
NEW ZEALAND EQUITIES
Aged care still kicking
A solid start to the year saw the S&P/NZX 50 Index return 4.3% in January, trailing slightly behind most developed market peers. There was a notable amount of dispersion in returns, with nine of the fifty companies posting double-digit positive returns, and a further nine finishing in the red.
Three of the nine double-digit performers were aged care providers, with a sector-wide recovery rally seeing Ryman, Oceania and Summerset chalk up returns of 29.0%, 17.1% and 10.4% respectively, with Ryman also the month’s top performer. Though medium term headwinds including weaker property prices and higher funding costs persist, the sector’s de-rating in the latter half of 2022 has provided a more attractive risk-reward proposition for those more focussed on longer term demographic tailwinds.
A number of companies upgraded their revenue guidance this month, including Serko (SKO), Fisher & Paykel Healthcare (FPH) and Vista Group (VGL), albeit reactions from the market were mixed. SKO and FPH returned 12.9% and 11.8% respectively, while VGL ended as the worst performer for the month returning -4.6%. Despite a strong top-line recovery and anxiety being reduced by a contract renewal with key customer Cineworld, sentiment on VGL remains lukewarm in the wake of an impending leadership change and uncertain timing of a return to profitability.
Resurgent global risk sentiment and optimism around a growth impulse from China’s reopening helped the S&P/ ASX 200 Index to a 6.2% return for January. Leading the charge were the Consumer Discretionary and Materials sectors, which returned 9.9% and 8.9% respectively, whilst Utilities was the only sector in the red with a -3.0% return.
Lithium powered January’s two best performers, with Sayona Mining (+36.8%) and Pilbara Resources (+26.7%) lifted by a ‘stronger for longer’ narrative on Lithium demand and prices. By contrast, AI technology company BrainChip (-15.4%) and coal miner Whitehaven (-10.8%) were the worst performers. BrainChip’s quarterly report failed to arrest its slide throughout the month, whilst Whitehaven weakened on a pullback in thermal coal prices and the NSW government proposing a domestic coal reservation and price cap policy.
Key macroeconomic data releases in January indicated the consumer might be starting to wobble. The unemployment rate ticked up to 3.5% despite an unexpected decrease in workforce participation, and December retail sales contracted 3.9% versus expectations of a 0.2% contraction. With emerging pressures on household budgets and the acceleration in CPI inflation to a 7.8% annual clip taking away some policy latitude, the RBA is likely to be faced with difficult decisions on how far to push interest rates in months to come.
Glass half full
Bond markets have started 2023 on a positive note with the Bloomberg GlobalAgg (NZD) Index delivering 2.0% for January. The rally was driven by yields declining in anticipation of central banks approaching the ends of their respective tightening cycles. The main market event to support this move was the US CPI continuing its disinflationary trajectory, printing 6.5% y/y for December, down from its peak of 9.1% y/y in June last year. Slowing personal consumption expenditure and core inflation measures were also conducive to lower yields. Adding to the global tailwind for bonds was the Bank of Japan’s decision to maintain yield curve control with no further increase to their target band for 10 year government bonds.
Antipodean bond markets followed global bond trends, coupled with better than expected inflation data. Australian government bonds outperformed with the S&P/ASX Australian Government Bond Index returning 3.3%, aided by softer consumer and unemployment data. While Australia’s fourth quarter CPI print accelerated to 7.8% y/y, it was below the RBA’s annual inflation estimate of 8%. Back in New Zealand, CPI appears to have plateaued at 7.2% y/y over the same period. Looking at the composition, domestically-driven inflation (nontradables) printed 6.6% which was below the RBNZ’s latest forecast of 7%. On the other hand, imported inflation (tradables) surprised most economists with an 8.2% reading. While there is some solace in recent inflation data, both the RBNZ and the RBA will likely want further evidence of inflation retreating before adopting a more dovish policy path.
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