March Monthly Market Update

As at end of March 2023


Credit S(q)uisse

It was a turbulent and volatile month for global equity markets, driven by the unforeseen tumult in the banking sector which raised fears over the resilience and stability of the global financial system. Stresses initially emerged in the US where smaller regional banks, Silvergate and Signature, were hit with “bank runs,” with large numbers of depositors rapidly withdrawing their funds. This deposit flight was instigated by concerns over the banks’ financial health given exposure to the troubled cryptocurrency market. Worries of a more widespread contagion subsequently escalated after the much larger Silicon Valley Bank (SVB) was seized by the Federal Deposit Insurance Corporation due to inadequate liquidity and insolvency issues. A niche bank with a concentrated corporate client base in the venture capital and technology industries, SVB also experienced a bank run when it became widely apparent that unrealized losses in its held-to-maturity portfolio (i.e., where accounting rules allow for securities to be carried at cost) were approaching its total equity value - effectively making the bank worthless.

While the demise of these banks was primarily caused by idiosyncratic factors such as concentrated depositor bases and flagrant mismatches between asset and liability risks, other more diversified and non-US banks were also caught up in the turmoil. The troubled Swiss bank, Credit Suisse, which has a recent history of scandals, regulator fines, and serious compliance failures, became the next prominent casualty of the deteriorating confidence in the global banking sector. After receiving an unusual request from the US Securities and Exchange Commission to delay its annual report and subsequently announcing “material weaknesses” in its financial reporting, its already battered share price continued to sink further. The final nail in the coffin for the 166-year-old bank was its largest shareholder, the Saudi National Bank, announcing it could no longer provide financial assistance. Over the ensuing weekend, the Swiss National Bank and Swiss Government brokered a controversial rescue deal where UBS would acquire its long-term archrival for CHF 3bn in stock. While this achieved the desired effect of stemming further panic by the end of the month, risk sentiment continues to remain fragile, as the fallout in terms of implications for economic growth, monetary policy, and markets more broadly is still very much unknown.


Despite echoes of the events that occurred 15 years ago during the Global Financial Crisis, the broader equity market remarkably took everything in stride, with the MSCI World (NZD) Index rising 2.1%. This performance was thanks to the plunge in fixed income yields as investors rushed to the safety of government bonds, reflecting increasing expectations that central banks will need to ease policy sooner than previously anticipated. Ironically, while this crisis began with banks having extensive exposures to the cryptocurrency sector and high-growth technology companies, these segments ended up being the best performers over March due to their sensitivity to declining yields. The MSCI World Technology (USD) Index rallied 10.0% over the month and Bitcoin rose by more than 23%, whilst the steep sell-off in global banks resulted in the MSCI Financials (USD) Index being the worst performer with a decline of 7.8%.


Dairy Daze

Notwithstanding local market movements broadly riding the coattails of global trends through the month, there were still plenty of stock specific headlines which on balance saw the S&P/NZX 50 Index underperform versus most global peers, returning -0.1% in March.

The major talking point to start the month was the potential takeover of church payment software company Pushpay (PPH). After shareholders rejected an initial offer of $1.34, a revised split bid which bumped the price to $1.42 for most shareholders was accepted a few weeks later. PPH returned 9.4% for the month. The top performer in the Index was Fonterra Shareholders Fund (FSF), returning 12.4% on solid interim results and a guidance upgrade. FSF also noted plans to return proceeds from the sale of its Chilean business to shareholders. Fellow dairy sector companies, Synlait Milk (SML) and a2 Milk (ATM) did not fare as well, returning -36.0% and -13.7% respectively, with SML the worst performer in the Index. SML fell sharply after materially downgrading its full year profit guidance. The company noted, among other issues, lower demand from its largest customer, ATM; and more delays related to the Pokeno processing plant. Warehouse Group (WHS) had a similar market response, returning -30.2% after reporting significantly reduced profit versus the previous year, calling out cost inflation and higher interest payments. Alongside the weaker result, the WHS board also decided to not pay an interim dividend.


Elsewhere, the listed property sector saw cap rate expansion begin in earnest, starting with Kiwi Property Group devaluing its properties by 4.1%, its second negative update in the last year. Goodman Property Trust also devalued its assets, to the tune of 4.7% with its cap rate increasing from 4.2% to 5.2%, while Investore’s assets were marked down 12% as its cap rate lifted to 5.7%.



Takeover Undertaker

A volatile March saw the S&P/ASX 200 Index return –0.2%, with the index performance masking vastly different sector outcomes. At one end, the Financials sector was dragged down 4.9%, as bank failures and forced consolidations in the US and Europe shook confidence across the banking sector globally. The associated expansion in credit spreads also put a dampener on the Property subsector (-6.8%), owing to REITs’ sensitivity to the cost and availability of credit. At the other end, Materials returned 5.9% with Iron Ore holding recent gains and Gold a beneficiary of the turmoil.

Among individual companies, M&A was a common driver behind the best performers. Lithium hopeful Liontown (+89.7%), global maltster United Malt (+33.1%), and funerary operator Invocare all received takeover offers; whilst Gold miner Ramelius (+41.9%) went on the offensive, making an all-scrip bid for fellow junior Breaker Resources. Worst performing were Lithium explorer Lake Resources which drifted 28.8% lower in the undertow of falling Lithium prices, and connectivity software developer Megaport, which fell 27.2% in the wake of an abrupt CEO resignation.


Data were mixed on the macroeconomic front, with annualised CPI inflation decelerating to 6.8% versus expectations of 7.2%, annualised GDP growth slowing to 2.9%, and the unemployment rate ticking down to 3.5%. While an exceptionally strong trade balance and elevated consumption and have helped avert a contraction in GDP thus far, the question remains whether the latter can continue. With a large cohort of households gradually resetting onto higher home loan payments, ‘mortgage stress’ is likely to be a key topic in coming months.




GFC Flashbacks

Global bond markets rallied strongly to deliver positive returns across the board in what became an eventful and volatile end to the first quarter. Evidence of strain from rapidly increasing interest rates showed up in both the US and European Banking sectors. The Fed acted decisively by stepping in to provide support as US regional banks experienced material outflows from depositors, and regulators forced the troubled Credit Suisse to merge with UBS to shore up confidence and limit any contagion effects in the global banking system.

In the flight to safe havens, New Zealand and Australian banks remained sound, and Government bonds finished ahead of corporate bonds as credit spreads spiked before partially retracing as liquidity assurances took effect during the month. The S&P/ASX Australian Government Bond Index was a top performer, delivering +3.8% underpinned by market participants shifting to a top-of-hiking-cycle view in Australia.


Amidst this bout of market uncertainty, the main feature was the Federal Open Market Committee (FOMC) decision which saw the overnight rates move higher by 0.25% to 5%. In addition to reassuring on financial stability, Fed Chair Powell noted that the committee was conscious of tighter bank lending standards that are likely to curtail the economy going forward. US CPI remains elevated at 6% y/y for the headline measure, suggesting that further policy firming may be required to maintain a disinflationary course. Closer to home, the RBA raised rates as anticipated by 0.25% to 3.6%. Governor Lowe endorsed a dovish tone by stating that Australian economic growth has slowed, and that the new monthly CPI indicator seems to have peaked. Consequently, the market is now pricing in a high probability of Australian rates being lower by year end. In New Zealand, GDP for the December quarter printed -0.6% q/q, markedly lower than the RBNZ’s forecast, which contemplated a weaker economy only materialising in June 2023. Naturally, this will bring into question whether the RBNZ still thinks its projected 5.5% peak in OCR is warranted.



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