Monthly Market Update
As at end May 2018
NEW ZEALAND MARKET
Busy month with March reporting season ends with a rally on home turf
The New Zealand sharemarket had another volatile month, but ended strongly on a broad based rally, with the S&P/NZX 50 Index returned 2.5%.
The best performing company for the second month in a row was Synlait Milk (SML) returning 12.5%. Most of this performance was in part due to SML’s inclusion in the MSCI Global Small Caps Index and also progress in their advanced liquid dairy packaging facility being built by Tetra Pak. a2 Milk (ATM), the largest company in the index, had a volatile month, falling 10.5% due to revenue guidance falling short of market expectations. The worst performer in the index was Comvita (CVT) returning -16.5%. CVT has recently been a potential acquisition target for an unnamed third party, however it was announced in May that the transaction will not go through which saw CVT’s share price decline significantly.
It was a reasonable March reporting season in New Zealand plus the large majority of Index constituents had positive returns for the month. The highlight was Mainfreight (MFT), up 7.3%, reporting an all-time high profit of $107.9m for FY18. MFT management has noted that this result gives them confidence to keep expanding globally.
Another company in the headlines was Mercury NZ (MCY). Firstly for being removed from the MSCI Global Index, which was expected, and secondly for agreeing to buy just under 20% of Tilt Renewables (TLT) from Tauranga Electricity Consumer Trust (TECT) with an option to buy a further 6.8%. Infratil, which owns 51% of TLT has said it is unlikely to approve any ownership above 20%.
Healthcare outperforms whilst Banks remain in the spotlight
The Australian sharemarket started the month strongly, outperforming its global peers and reaching a new record high mid-month. However increasing geopolitical tensions and volatile global fixed interest markets weighed on sentiment, the market giving back much of the initial gains. Despite this, the S&P/ASX200 still delivered a reasonable return of 1.1% for the month.
Across the individual sectors, Telecommunications (-10.2%) was once again the worst performer. This was driven by Telstra, which returned -11.9% for the month after a disappointing third quarter trading update. The top performing sector was Healthcare (+5.6%), largely driven by CSL as it made a solid return of 9.1%. CSL upgraded its FY18 guidance due to strong performance across its key products and geographic segments.
The Banking (-0.1%) sector was mixed as the royal commission into misconduct continues to progress. The investigation is expected to run for the rest of the year and will have significant effects on how banks and financial services providers operate.
The Australian Federal Government announced its 2018 Budget, forecasting a surplus in 2020. However, the Budget’s proposal to move small and inactive superannuation balances to the Australian Tax Office will negatively affect Link’s (-17.3%) Australian revenues over time.
US economic strength offsets tariffs and European concerns
It was another volatile month for global equity markets however, the benchmark index managed a positive 1.1% return. This was helped by a resilient US stockmarket and a slightly weaker NZ dollar. The Euro’s weakness continued to be a feature during May, trading at its lowest level since last November. Economic data coming out of the euro zone continues to be weak and the political situation in southern Europe is again beginning to look tenuous. The corruption scandal in Spain may bring down the Rajoy government while in Italy the anti-EU coalition government is openly talking about debt restructuring and backing away from euro zone deficit targets and structural reforms.
Capital flows back into the US were evident during the month with a rising stock market and continued dollar strength. The futures market is indicating that the Fed will hike rates 3 more times this year from a one in three chance last month to even-odds. The yield on the 10-year treasury bond pushed through to a new high for the year rising to 3.1%. This tends to feed right back into mortgage rates, which are rising in tandem with higher bond yields, crimping housing affordability along the way. However, this dynamic reversed somewhat in the last week of the month as bond yields fell sharply in response to the fall in the oil price. It only took the Saudi Oil Minister to suggest that it was time to increase supply to curb the recent rally in oil prices, which then in turn dampened inflations expectations, reversing bond market sentiment.
Flight to quality following political developments in Europe
Global bond markets had positive returns during May, with the best performing assets being high quality government bonds. This was in response to political uncertainty in Italy as coalition negotiations dragged on and there was concern that another election may have been required. However right at the end of the month Giuseppe Conte was appointed prime minister with support from both major “populist” parties. This is far from a market friendly outcome as the policy direction is likely to be far more aggressive on fiscal spending and in direct conflict with the EU.
The worst possible outcome could be an exit from the Euro (although this is not something supported by the majority of Italians). Market concerns have seen a significant spike in Italian bond yields with the 10-year yield rising from 1.5% to 2.9% in three weeks. However, this remains well below the levels towards the end of 2011 where the yield was over 6%. The beneficiaries of this movement have primarily been Germany and the US government bonds where yields have fallen sharply.
New Zealand and Australian government bonds also benefited with the government bond indices outperformed the corporate bond indices. In New Zealand, the S&P NZX Investment Grade Corporate Bond Index rose by 0.6% while the S&P NZX Government Bond Index was up 0.7%.
This month saw the first budget released for the current New Zealand coalition government and was largely in-line with expectations. There was however, an increase in planned NZ government bond issuance and also an increase in the borrowing ability of Housing New Zealand. This was one catalyst for a $500m bond issue by Housing New Zealand at the end of the month in its first deal since 1999. This is part of larger $3bn external funding requirement relating to an extensive refurbishment and new build program, a key government initiative.