Monthly Market Update
As at end December 2018
Geopolitics, the Fed and tweets sink markets
Extreme bouts of volatility hit international markets this month. Record moves were caused by a plethora of headlines concerning global trade wars, Fed’s policy direction, troubling tweets from Donald Trump and the re-emergence of a time-honoured recession signal. The MSCI world Index returned -5.4% in NZD terms, with the benchmark’s -7.6% USD decline partly offset by a weaker Kiwi dollar. The Japanese and the US equity markets saw substantial declines this month as the Nikkei 225 and the S&P500 indices returned -10.3% and -9.0% respectively.
Markets commenced the month on a positive note. The more dovish tone by the Fed in November continued to support risk sentiment, and news of a successful trade meeting at the G20 summit between Trump and the Chinese President, Xi Jinping, lifted hopes that a trade deal may soon be finalised. However, in the immediate aftermath, a series of anti-trade tweets by Trump proclaiming himself as “a Tariff Man” and the arrest of the Huawei CFO, who is the daughter of the company’s founder and an ex-People’s Liberation Army officer, sent markets lower.
This was then further compounded as short term interest rates rose higher than long term rates, a widely recognised signal of a potential economic recession. The Fed held its final meeting for the year and hiked rates as expected. However, during the post-meeting conference, the bank reiterated it would continue to unwind its balance sheet regardless of financial markets or the economy. This, combined with Trump’s continued attacks on the Fed’s policy stance and reports he has discussed firing the Fed chair pushed equity markets down with a number of indices officially entering “bear market” territory; defined as a peak to trough decline of more than 20%.
NEW ZEALAND MARKET
A green island in a sea of red
The S&P/NZX 50 capped off 2018 up 4.9% for the year, outperforming most developed world markets. Among local data releases were a disappointing September quarter GDP print of 0.3% versus market expectations of 0.6%, and business confidence in the ANZ survey ticking-up from -37.1 to -24.1. Overall sentiment in the survey remained pessimistic, but the outlooks for activity, exports, and ease of obtaining credit improved notably.
For the month of December, the local bourse was down 0.1%, holding up well against tumultuous conditions in global markets. Utilities and Property Trusts were the standout sectors, whilst Aged Care operators dragged on the index. Contributing to the market’s resilience was strong momentum in A2 Milk (ATM) which returned 7.7% for the month and was also best performer in the index, followed by Stride Property Group with a 5.4% total return. On the opposite side of the ledger, the largest declines were Sky TV (SKT) and Comvita (CVT) which returned -21.3% and -15.1% respectively. Sky TV extended its satellite capacity agreement with Optus for another 10 years at a cost of over $200m and CVT was dropped from the S&P/NZX 50 Index, replaced by film industry software developer Vista Group.
A red 2018 could have been worse
The Australian market was also remarkably resilient considering the sharp declines seen across other offshore markets. The S&P/ASX 200 Index recorded a flat return of -0.1% for the month, significantly outperforming its international peers. For the 2018 year, the Index returned -2.8%, marking its first negative calendar year performance since 2011.
The resilient performance of the Australian market was largely attributed to the strong returns seen across the second largest sector, Materials sector (+5.3%). BHP Billiton, the largest listed Australian miner, rallied 11.5% as it completed its US$5.2b off-market buyback and announced a special dividend as part of its capital return program funded by the recent sale of its US onshore oil assets. Gold producers also made solid returns as the global price rallied on the back of risk aversion in global markets.
The worst performing sector was Communication Services (-5.0%) driven down by media companies such as Nine Entertainment and Ooh! Media that declined more than 20%. Economic data releases were broadly negative indicating that economic momentum is waning. The GDP growth rate was 0.3% for the 3Q18 period, well below the 0.6% market estimate. The slowdown was primarily driven by reduced consumer spending that makes up more than 50% of the economy. The weak Australian housing market has likely played a part in this as CoreLogic dwelling price data for December showed national property prices have fallen 4.8% for the year, the fastest rate of decline since the Global Financial Crisis.
RBNZ proposes more onerous capital requirements
The last month of 2018 was a positive one for global fixed interest markets, particularly for sovereign bond markets. This was driven by increased demand for government bonds in response to increased volatility in risk assets and signs of weakening global growth. Political developments have also been significant, particularly in the US, as President Trump stepped up his very public criticism of the Fed leading up to its decision to increase interest rates this month. The independence of the central bank is fundamental to the way that most countries operate monetary policy and this sort of political interference is highly concerning for investors.
US government bond yields have fallen sharply and we have seen parts of the yield curve invert, where some longer term interest rates are lower than short term interest rates. Yield curve inversion has been a solid harbinger of upcoming recessions in the past, and this has received a lot of market attention recently.
In New Zealand there was a similar trend with the S&P/ NZX Corporate Bond Index and S&P/NZX Government Bond Index returning 0.9% and 1.0% respectively, although these returns were lower than experienced by global bond markets.
This month the RBNZ released its consultation paper on bank capital adequacy which is proposing higher capital requirements. However unlike Australia, where APRA is also proposing higher capital requirements, the RBNZ is being more prescriptive on the form of capital required, with a strong preference for shareholder equity. The RBNZ is also proposing less leeway in the risk weightings that banks use to measure their assets. It is expected the combined impact of these proposed changes will significantly impact the return on equity for banks operating in New Zealand, which could result in upward pressure on borrowing rates, particularly on mortgages. However the RBNZ has the option of decreasing the OCR to lessen the impact on the economy if it was required.