Monthly Market Update
As at end October 2018
Markets underwater in red October
Equity markets fell sharply in October with the MSCI World Index losing 5.9% (NZ$ terms). Europe, Asia and Emerging Markets (EM) in particular were hit the hardest. Emerging Markets are now touching 19-month lows as investors continue to exit this asset class. There is no doubt that the nature of this market setback is completely different to the earlier ones we have experienced this cycle. They have been until now more isolated, occurring around Greece, debt ceilings, government shut downs, Brexit and EM turbulence.
This time around however, we have the Fed stepping up its monetary policy tightening and other central banks no longer in the liquidity-provisioning mindset as inflation pressures look to be re-emerging. We have a bear market in Chinese equities, along with the prospect of increasing tariffs and trade barriers.
It seems this combination of factors have been sufficient, at least for now, to cause investors to wind back their risk taking.
The major US indices have not been as heavily marked down as the rest of the world, with the exception of the tech-heavy Nasdaq Index. With the third quarter earnings reporting season almost over, EPS growth is running at an impressive 22% on a YoY basis. This has certainly provided a general underpinning to this market, however what is concerning analysts is the frequency of weaker revenue numbers being reported along with mixed profit guidance. Common concerns cited by US companies were labour market shortages and disruptions to business activity from tariffs.
NEW ZEALAND MARKET
Global trends dominate local market movements.
The New Zealand sharemarket followed global trends in October, with the S&P/NZX 50 down as much as 8.4% before recovering slightly to end the month down 6.4%. This was the largest monthly decline since May 2010, only three companies in the index ended the month in positive territory, while ten companies fell more than 10%.
The clear standout was Restaurant Brands (RBD), which bucked market trends and ended up 9.7% after receiving a non-binding indicative approach from Finaccess Capital to acquire up to 75% of the company at $9.45. Finaccess is a Mexican private equity fund that already has significant holdings in other global QSR brands. Negotiations are still ongoing and no formal takeover notice has been issued yet.
It was another tough month for milk producers a2 Milk (ATM) and Synlait Milk (SML), falling 7.5% and 20.1% respectively, the latter being the worst performer in the index. This continued the trend from September based on a weaker IFC outlook and Chinese regulatory uncertainty. At the end of October, SML was down more than 35% from its peak less than two months ago.
The New Zealand Institute of Economic Research (NZIER) released its quarterly survey of business opinion in October, which reported that business confidence dropped to the lowest level since March 2009. The largest concern for businesses is uncertainty around Government policies, while cost and availability of labour were also among the biggest issues.
Gold rush for miners, while AMP gets punished.
The sharp sell-off seen across global markets also had an impact on the Australian sharemarket, with the S&P/ASX 200 Index declining 6.1% wiping out all the gains made this year. Overall, it was a very volatile month, with the Index at one point being down 10.2% before recovering some ground later in the month. Performance across the Australian market echoed global trends with the Information Technology (-11.2%) and Energy (-10.5%) sectors being the worst performers. Defensive sectors such as Real Estate (-3.1%) and Utilities (-4.0%) were the best relative performers however even these sectors saw hefty losses.
The widespread and sudden decline in risk tolerance is generally positive for safe haven assets such as gold. This served Australian gold miners such as Evolution Mining and St. Barbara particularly well, seeing solid returns of 12.5% and 19.2% respectively. AMP was the worst large cap performer, falling 22.6%. The market was disappointed by the company announcing its intention to sell its life insurance business and divest its New Zealand Wealth unit via an IPO sometime next year.
In terms of economic data, Australian house prices fell for the 13th consecutive month, recording a year on year fall of 3.5%. The unemployment rate improved from 5.3% to 5%, but this was largely due to a fall in the labour participation rate. The annual inflation print for the September quarter came in at 1.9%, missing estimates and coming below the RBA’s inflation target band of 2%-3%.
New Zealand bond markets deliver positive returns.
News headlines in October were dominated by the extreme volatility experienced in equity markets, by comparison bond markets were relatively quiet.
However, one of the catalysts for the equity market sell off has been rising bond yields, particularly in the US. The US 10-year government bond yield reached a multi-year high of 3.23% in early October. Canadian bonds have followed a similar pattern, and like the US, the central bank is actively tightening monetary policy, delivering another interest rate hike this month. Other developed government bond markets have been more mixed, with yields slightly lower over the month for most European sovereign issuers, Japan, Korea and the UK. The equity market volatility did have an impact on credit markets, and in most regions corporate and high yield bonds underperformed government bonds. However, this impact was relatively mild and credit spreads remain low by historical standards.
New Zealand government and corporate bond indices outperformed their global peers, with the S&P NZX Government Bond Index and the S&P NZX Investment Grade Corporate Bond Index both returning 0.4% for the month. There was no OCR review this month and economic data remains mixed. The ANZ business confidence survey continues to highlight downside risks to economic activity, with a net 37% of respondents expecting conditions to worsen over the next 12 months. September quarter CPI data was slightly ahead of RBNZ and market expectations. The annual CPI change was 1.9%, which is very close to the middle of the RBNZ target range.