Monthly Market Update
As at end November 2018
Strong NZD dilutes international returns
The MSCI World Benchmark Index (NZ dollar terms) fell -3.9% in November. This followed the weak performance of most major sharemarkets in October however, the fall in the index this month was almost entirely due to the NZ dollar’s sharp rally against all the major currencies. This caused the positive local market performances in the US, Europe and Japan to all be negative when measured in NZ dollar terms. Many emerging market currencies rallied also, having been marked down heavily for most of this year. A stand out was the Indian Rupee, which reacted positively to the sharp fall in the price of oil. India is a big importer of oil and benefits more than most when the oil price falls.
After peaking around US$77/barrel in early October, the price of oil has fallen sharply, finishing the month at approximately US$51/barrel. The turnaround has caught many by surprise, but seems to be reflecting a falling off in demand particularly from China and Europe as their respective economies slow. The other reason cited is the decision by the US to waive the Iran ban for eight importing countries at the same time that Russian production is booming.
The rally in many sharemarkets in the last week of the month followed two market friendly announcements. The first was a change in tone by the US Fed Chairman Powell in a speech where he indicated the end of interest rate rises might now be closer. The second piece of good news was the handshake deal between President Trump and President Xi where a 90-day truce was agreed in the current trade war. This hopefully enables enough time for negotiations to be successfully concluded without the imposition of tariffs.
NEW ZEALAND MARKET
Reserve met for Trade Me auction
In November the New Zealand sharemarket broadly followed global trends, albeit with a bit less volatility as the S&P/NZX 50 Index ended the month up 0.8%. For the year to date, the local bourse remains one of the few developed markets in positive territory (+5.1%).
The best performing company in the index was Trade Me (TME) returning 26.4%, mainly due to a non-binding indicative proposal to buy 100% of the company for $6.40 per share by Apax Partners. Apax is a London-based private equity firm that has owned other online-classified assets in Europe and China. Since then, TME received a competing conditional offer of $6.45 per share from Hellman & Friedman, a US based private equity firm.
The worst performing company in the Index for not only November, but also over the last 12 months was Fletcher Building (FBU). It returned -21.2% for the month after another downgrade to their FY19 earnings guidance. The company noted that a slowdown in the Australian residential market and an unplanned outage of the Golden Bay cement mill had a significant impact on its earnings expectations. FBU also confirmed the sale of the Roof Tile Group and in their own words, are “progressing well” on the sale of the Formica business.
Index returns turn red for the year
It was another difficult month for the Australian sharemarket as it declined for the third consecutive month and underperformed global developed markets in local currency terms. The S&P/ASX 200 Index returned -2.2% and is now in negative return territory for calendar 2018. If the market fails to lift for the remainder of the year, this will mark the first full calendar year of negative performance for the Australian market since 2011.
The best performing sectors (and the only ones that generated positive returns) were Financials (+1.4%) and IT (+1.0%). There was no discernible trend amongst banks and financial services given mixed trading updates and continued probing of operator misconduct in the sector by the Royal Commission.
Within the IT sector, many stocks made solid returns driven by positive trading updates and improving sentiment post October’s sharp sell-off. The worst performing sector was Energy (-10.3%), on the back of a 22% fall in the oil price. This was the largest monthly decline in over a decade, driven by rising fears of a global supply glut and weakening global growth.
Domestic economic data releases were mixed with employment remaining stable, business confidence falling, and consumer sentiment improving. House prices continued to fall, with the CoreLogic National Hedonic Home Index declining 4.1%. This was led by major centres such as Sydney and Melbourne, which are down 8.1% and 5.8% year on year respectively.
US corporate bonds under pressure
November was a positive month for global bond markets due to lower government bond yields. However, there was significant divergence between government and corporate bond markets. In the US for example, the Bloomberg Barclays US Corporate Bond Index fell by 0.9% while the Bloomberg Barclay US Treasury Index was up by 0.9%. The same US Corporate Bond Index is also down 3% over the last 12 months and the average yield has increased from 3.3% to 4.4% over this time period. There has been a gradual deterioration in the credit quality of the corporate bond market which, compounded by increasing market volatility, is leading investors to require a higher yield. This is a sharp contrast to what has happened in New Zealand where corporate bond yields are generally lower than they were 12 months ago, and where the NZX S&P Corporate Bond Index saw a positive return of 3.9% for the year.
Government bond yields in New Zealand were slightly higher this month in response to strong employment data and the RBNZ monetary policy statement. The RBNZ left the OCR unchanged as expected but has acknowledged the recent pick-up in inflation and higher than expected GDP growth for the June quarter. The outlook for monetary policy remains finely balanced which is reflected in the OCR forecasts with no change expected until late 2020.
The RBNZ also released its Financial Stability Report this month which was noteworthy as they have eased the LVR restrictions for new residential mortgages. This will allow banks to lend a higher proportion to owner-occupiers with less than a 20% deposit, and will also benefit investors, with the restrictions kicking in at a 30% deposit rather than 35%. The justification for this change was that systematic risks to the financial system have eased slightly. The RBNZ, however, maintains the view that risks are high and commented that higher capital requirements for the banking sector is likely.