Monthly Market Update
As at end June 2018
NEW ZEALAND MARKET
NZ market gets ahead of the pack
The New Zealand sharemarket continued its strong run as the S&P/NZX 50 Index hit a new record high in June. The index returned 3.3% and has become the best performing developed market index in the world for the year to date. Exporters and companies with offshore earnings look likely to receive a boost from a weaker NZ Dollar, which fell significantly against all major currencies. On a less positive note, the ANZ business confidence index published in June was down for the fourth consecutive month. The biggest issues highlighted were difficulty in finding skilled employees, wage inflation and the threat of increased regulation.
The best performing company in the Index was Kathmandu (KMD) with a total return of 21.8% after upgrading its full year profit guidance. KMD has been able to increase its revenue through improved full price sales and a higher average selling price. Another strong performer was FPH returning 13.4% in June on the back of record profits reported in late May and was also a beneficiary of the weaker NZD.
Fletcher Building, up 5.5%, continued its upward momentum since its April capital raise after a positive reaction to the investor day in Sydney where a restructuring strategy was unveiled. The new strategy includes reducing corporate costs by $30 million a year, primarily through headcount reduction and doubling EBIT from its Australian business by 2023. One of the few negative performers for the month was New Zealand Refining (NZR) returning -1.2% after an extended shutdown of its hydrocracker unit. NZR announced that this shutdown would have a negative $40 million impact on its net profit after tax for the year.
Commodity rally pushes the ASX200 to record highs
The Australian sharemarket began the month on a lacklustre note. However, the concerns over escalating trade tensions between the USA, China and Europe did not have much of a local impact and the strong rally across commodities late in the month helped lift the S&P/ASX 200 index to new record highs. The index finished with a total return of 3.1%.
The top performing sector was Energy (+7.8%) driven by the sharp rise in oil prices. The WTI oil price rose 10.6% to US$74/barrel largely on concerns over potential global supply disruptions. The worst performing sector was Telecommunications (-5.8%) and this was again driven by poor performance of the sector’s single largest constituent, Telstra (-6.5%). The company held an investor day where it released guidance for FY19 that missed expectations.
There was a reasonable amount of transactional activity throughout the month. A Hong Kong consortium, consisting of Cheung Kong Infrastructure and Power Asset Holdings, made an all cash offer of AU$13b for Australia’s largest natural gas pipeline business, APA Group. The acquisition will need to undergo a regulatory review that is expected to take 12 weeks.
The outdoor advertising sector, in particular, experienced a flurry of activity involving its two most dominant firms. oOh!Media acquired a bus stop advertising firm Adshel for AU$424m. This bid beat out its competitor, APN Outdoor, which itself received a takeover offer of AU$1.1b from the world’s largest outdoor advertiser; the French based JCDecaux.
Weaker Kiwi dollar boosts international returns
The significant fall of the NZD against most major currencies was the primary driver of the MSCI World Index benchmark (NZD) posting a strong return of 3.6% for the month. This disguised the negative sharemarket performances of many countries with the exception of the US where the market was slightly up. The real prospect of a trade war between the US and its major trading partners remained front and center for most investors. The US has already imposed tariffs on steel and aluminum and a further range of tariffs are to be imposed on China. What will be watched closely as this unfolds is how corporates in America will react as they begin to see import costs going up
and local jobs potentially under threat, given their complex global supply chains.
In the US, investors are continuing to move away from cyclical companies, which were the stars of 2017, in favour of Technology and Defensive companies. The median ex-Tech stock is now down 5% from its peak, while Banks were off an average of 10% and homebuilders down by 21% from their highs. US investors have also become more negative on international shares with a sharp drop off in flows into international ETF’s. The investment thematic of synchronised global growth looks to be under threat, with the increase in tariffs likely to reduce global trade flows. This could be particularly harmful for Emerging market economies and is one reason why these stock markets have underperformed. The MSCI Emerging Markets Index fell 4.1% in June and is now down 15.0% from its peak in January.
New Zealand bond markets outperform
Global bond market returns were mixed in June. Developed market government bonds were the best performers as yields moved slightly lower or flat. The worst performing markets were corporate, high yield and emerging market bonds, all of which were impacted by wider credit spreads. Emerging market bonds had a particularly rough month with the Bloomberg Barclays Sovereign Emerging Market Index falling by 1.2% and is now down 3.7% since March.
Investors have become more risk averse in response to an increasingly hostile relationship between the US and the rest of the world on trade policy. The downside risks to global economic growth appear to be rising. However, the domestic economy in the US remains strong, which has allowed the Fed to increase interest rates again this month. The median projection from the members of the Federal Open Market Committee is for a rate of 2.375% at the end of 2018, which implies another two hikes still to come.
Both New Zealand and Australian central banks left interest rates unchanged this month, as they have been for some time. However, there were subtle changes to the communication from the RBNZ suggesting they are closer to making a change. Given a weaker outlook for global growth, declining domestic business confidence and no data suggesting an inflation pickup on the horizon, there is some speculation that the next move could be a cut. Most economists still expect the next move to be a hike but not in the next 12 months and some have pushed out their expectations towards the end of 2019. The result is that we have seen short and medium term bond yields fall and the NZD weaken. This has been positive for local bond markets with the S&P/NZX Corporate Bond Index returning 0.4%. The S&P/ NZX Government Bond Index did slightly better with a return of 0.6%, outperforming most global bond markets.