NEW ZEALAND MARKET
Late rally brings New Zealand market home
The New Zealand sharemarket ended the month up for the first time since January with the S&P/NZX 50 Index returning 1.5%. Even though this was a positive result, the local market still lagged behind most global peers and almost ended in negative territory if not for a strong rally of 2% in the last two trading days of the month.
The best performing company in the index was Synlait Milk (SML) returning 19.2% after securing a supply agreement, which will allow it to double its lactoferrin manufacturing capacity. Lactoferrin is a high value, speciality ingredient used in nutritional food and infant formula products around the world.
Another strong performer was Fletcher Building (FBU) with a 9.3% return announcing a deeply discounted rights issue to raise NZ$750m. The funds raised from this issue will allow FBU to resolve debt covenant breaches and move ahead with its restructuring strategy, which will include rationalising the buildings & interiors segment and potentially divesting its Formica and Roof Tiles Group businesses.
The worst performer in the index was Pushpay (PPH) returning -7.0% despite announcing a doubling in revenue to $70m for the March year. The Annualised Committed Monthly Revenue (ACMR) has fallen from US$106.4m to US$86.4m since the seasonally high December quarter. The largest negative contributor to the index performance was Fisher and Paykel Healthcare (FPH), which was down sharply earlier in the month due to slowing growth in the sales of its Obstructive Sleep Apnoea (OSA) products, and perceived delay in new product launches. Even after a strong rally following a research paper that showed significant benefits for Chronic Obstructive Pulmonary Disease (COPD) patients using its myAirvo device, FPH still ended down 3.4% for the month.
Commodity rally paves the way for Australian market
The Australian sharemarket had a solid month with the S&P/ASX 200 Index returning of 3.9%. This was on the back of strong offshore markets and rising base metal and oil prices. The Energy (10.8%) and Materials sectors (7.6%) were the best performers driven by the commodity market rally.
Aside from the rising oil prices, aluminium and iron ore prices also performed strongly lifting 15.6% and 4.7% respectively. Despite this, the AUD which is usually influenced by commodity market movements, fell against the USD by 1.9%. Financials (0.2%) and Telecommunications (2.0%) were the worst performing sectors but still delivered positive absolute returns.
There was a reasonable amount of corporate activity and news flow. Most notably Santos receiving a A$13.5b takeover offer from Harbour Energy, plus Healthscope receiving a $6b takeover offer from a consortium led by the private equity firm BGH Capital.
Commonwealth Bank confirmed it would move ahead with floating its funds management business, Colonial First State, by the end of 2018 estimated to be worth AU$4-5b. Economic data releases were mixed with business and consumer confidence declining from recent highs, inflation for the first quarter being weaker than expected, while on the positive side retail sales saw a significant uplift.
US dollar back in vogue
The MSCI World Index posted a solid recovery in April rising 3.6% in NZD terms after a weak March. The catalyst for the bounce back was the sharp rally in the US dollar, which has been falling against most currencies for more than a year. The US dollar rallied 2.9% against the Kiwi making US dollar assets more valuable in NZ dollar terms. The US dollar was also strong against the Euro and the Yen. The strength of the Euro and the Yen has been hampering both their respective stockmarkets this year, however with their currencies falling over the month both markets rallied strongly in local currency terms.
The primary reason for the turn in the US dollar appears to be the realisation the Federal Reserve (Fed) will continue raising interest rates for at least the rest of the year, while in Europe and Japan their respective central banks remain on hold. During the month one of the key short-term measures of inflation in the US, the PCE deflator, posted an annualised 2.5% for Q1 2018, up from 1.9% in Q4 2017. This number could be of concern to the Fed, as it implies inflation could still be accelerating.
Oil also continued its surge in April, rising by 7% and it is now up 18.2% YTD. The market has become finely balanced in 2018. On the supply side Venezuela’s production continues to collapse, Saudi Arabia is cutting production more than the OPEC agreement, and countries such as Angola, Algeria and Norway are seeing natural declines in their mature oil fields.
Surprisingly, on the demand side world consumption has started rising again, this year by 1.5million barrels per day (mbd) to 99.5mbd. The combination of the two has created a tight market and bullish price expectations. Oil price moves have a big impact on inflation and its rise will be worrying all central banks.
US 10 year bond yields crack 3%
Most global bond markets had negative returns in April due to rising government bond yields. This was particularly true in the US where we saw the 10-year treasury yield rising above 3% for the first time since the end of 2013.
It has since drifted down below 3%, but interestingly remains above equivalent bond yields in both New Zealand and Australia which have historically been higher yielding markets. This highlights the underlying differences in economic momentum and monetary policy outlook between the countries. In the US the Fed has been steadily increasing the target Federal Fund rate (and is forecast to continue to do this) while both New Zealand’s and Australia’s central banks have kept their cash rates flat.
The upper end of the Federal Funds target range is now the same as the OCR in New Zealand (and above Australia) and could potentially be 0.50%- 0.75% higher in twelve months depending on the pace of rate rises from the Fed.
As a result of a flat outlook for short term interest rates and a relatively muted economic outlook, the New Zealand bond market continues to outperform global markets. In April the S&P/NZX Investment Grade Corporate Bond Index had a positive return of 0.1% and is up 4.4% in the last 12 months. This is well ahead of most comparable international corporate bond indices. The S&P/NZX Government Bond Index was down 0.2% for April but again did better than most comparable international indices. We are not expecting this dynamic to change any time soon, mostly because we think there are more risks for international bond markets. The main risk to New Zealand bond markets in the short term would be signs of inflation picking up faster than expected. Outside of housing relating costs there haven’t been any real signs of this occurring but we do expect some flow on impacts from minimum wage increases and also the recently announced fuel tax increases which we will be watching closely.
For more information contact the QuayStreet team - 0800 782 900.