INVESTOR HUB

Monthly Market Update - March 2018

As at end March 2018 

INTERNATIONAL MARKET

USA vs. China on tariffs. Will they build a bridge or a wall?

Global share markets remained under pressure in March with the benchmark MSCI World Index (NZD) returning -2.1%. Market volatility began early in the month after US president, Donald Trump, imposed hefty tariffs on imported steel and aluminium. Several weeks later additional tariffs were imposed, targeting Chinese made goods and included blocking Chinese investment in strategically important sectors. The Chinese retaliated with their own levies on US imported goods frightening global markets further. The expectation at this point is that middle ground will be found and a full-blown trade war can be avoided.

As was expected, the US Federal Reserve lifted its target rate by 0.25%. However, what did surprise markets was the upgrade to their economic outlook and the expectation of a faster pace of interest rate hikes. While the prospects in the US remain solid, other regions of the world are beginning to look less encouraging. European leading indicators are falling short of expectations and over in China growth continues to moderate as it gets to grips with credit excesses and overcapacity across many of its industries. This is now starting to be reflected in some emerging Asian economies that have close links with China.

NEW ZEALAND MARKET

Local stories are louder than the global noise...for now.

The New Zealand share market was down for the month with the S&P/NZX50 Index falling by 0.7% which was relatively minor in comparison to international markets. Market headlines have been dominated by escalating trade tensions between the US and China. There does not look to be a significant direct impact for New Zealand from what has been announced and discussed so far, however the potential collateral damage on global trade volumes is a risk factor that we are monitoring closely.

Despite the negative market return there was a roughly even split between positive and negative returns at the security level. Several stocks delivered returns above 5% with the best being PushPay, Chorus and Summerset Group.

Corporate news flow included the announcement by SKY Television of the resignation of its long serving CEO John Fellet. While not completely unexpected it does come at a difficult time for the company which recently announced changes in its pricing model to address a falling subscriber base. Kathmandu was also in the headlines following the release of its first half earnings result and announcing the acquisition of Oboz, a US based footwear brand. This follows significant M&A activity in this sector with Icebreaker, Macpac and Mountain Designs all changing ownership in the last 12 months. Finally we noted the announcement by Nestle that it is launching a competing infant formula product to A2 Milk in China called "Atwo". Given the phenomenal success that A2 Milk has had in this category it was only a matter of time before serious competition started to appear, however this is perhaps a bit earlier than the market had expected.

Market Performance

AUSTRALIAN MARKET

No tariffs for Australia yet, but markets were still affected by uncertainty.

The Australian share market performance was broadly flat throughout March before it fell sharply in the final week of trading. The S&P/ASX200 Index finished the month with a total return of -3.8%. The fall was driven by concerns over the introduction of import tariffs in the US, in particular on Chinese goods, and what impact it may have on global trade. The US has announced Australia is exempt from the new tariffs but only until 1 May where the extension is pending on the status of ongoing discussions regarding its national security.

The Australian share market performance was broadly flat throughout March before it fell sharply in the final week of trading. The S&P/ASX200 Index finished the month with a total return of -3.8%. The fall was driven by concerns over the introduction of import tariffs in the US, in particular on Chinese goods, and what impact it may have on global trade. The US has announced Australia is exempt from the new tariffs but only until 1 May where the extension is pending on the status of ongoing discussions regarding its national security.

Declining bond yields were supportive for Property (+0.1%) and Utilities (-0.8%) making them the top performing  sectors where the worst were Telecommunications (-6.1%) and Financials (-5.9%). The decline in Telecommunications was largely driven by TPG Telecom’s (-10.2%) 1H18 trading update that raised a number of concerns regarding its declining broadband subscribers, margin pressures and funding capacity for its 5G-spectrum bid. Global trade war fears did affect bulk commodities such as Australia’s top export, iron ore, which dropped 18.9%. The Australian domestic economy continues to send mixed signals. Business conditions and confidence levels are elevated indicating robust business activity, where as the latest GDP, retail sales and unemployment data releases have all slightly missed expectations.

FIXED INTEREST

Credit spreads widen, the Fed hikes and new targets for the RBNZ.

Market volatility continued in March although this was more evident in share markets than bond markets. Market headlines have been dominated by escalating trade tensions between the US and China.

The main impact for bond markets has been a widening in credit spreads as investors are starting to require more compensation for investing in lower quality securities. 
Somewhat lost amongst the noise was another interest rate hike from the Fed, which was the 6th hike in this cycle and took the target Federal Fund range to 1.5% to 1.75%.

The New Zealand bond market had a solid month with the S&P/NZX Investment Grade Corporate Bond Index returned 0.4% for the month but underperformed the S&P/NZX Government Bond Index, which was up by 0.9%. The RBNZ elected to leave the OCR at 1.75% in what was the last OCR announcement presided over by Grant Spencer. The incoming governor, Adrian Orr, has now signed a new Policy Targets Agreement (PTA) with the government that will determine the operation of the RBNZ going forward. The changes have been well flagged, the two most significant being a shift to a dual mandate that looks at inflation and employment and the shift to a committee approach for making monetary policy decisions.

For more information contact the QuayStreet team - 0800 782 900

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