Monthly Market Update
As at end September 2018
Land of the rising sun, shines in September
The MSCI World Index (NZD) returned 0.6% for September. The month finished on a positive note with the in principle agreement of a new trade deal between Canada, Mexico and the US. NAFTA, as the old agreement was called is replaced by USMCA. The deal the US pushed for essentially levels the playing field in a number of industries it felt disadvantaged in, particularly the automotive, dairy and generic drug industries.
The Japanese sharemarket was the star of the month rising 6.2% (local currency terms) and testing a 27 year high. Prime Minister Abe won his third consecutive three-year term as head of the LDP handily with 70% of the vote, giving him a clear mandate to push through the third arrow of his three arrows reform program. The pace of economic activity in Japan has, very quietly continued to improve to two-year highs alongside visible signs of an acceleration in capex growth.
Japan’s jobless rate also has continued to decline, with a fall to 2.4% in August. The result of this better economy and tight labour market is that inflation is finally showing a pulse with core CPI rising 1% YOY.
Both the Chinese sharemarket and the yuan moved lower during September in the wake of some fairly disappointing economic reports. While Chinese retail sales and industrial production were roughly in line with expectations, the weakness in fixed asset investment, which slowed to a 5.3% growth rate, stood out. This is an important driver for the Chinese growth model and therefore requires close attention as it has now fallen to its slowest pace since 1999.
NEW ZEALAND MARKET
Index up, despite weak performance from large caps.
The New Zealand sharemarket ended September in positive territory as the S&P/NZX 50 Index returned 0.4% after being down almost 3% earlier in the month.
Even with forty of the fifty companies in the index showing positive returns, averaging close to 4%, the two largest companies, Fisher & Paykel Healthcare (FPH) and a2 Milk (ATM) again dominated the overall index return, as they were also two of the worst performers.
FPH fell sharply at the start of the month and ended down 8.2% after announcing it would continue to contest patent infringement allegations from ResMed. FPH reduced its profit guidance on the back of increased legal costs. ATM experienced a similar trend to FPH with price movements coming early in the month after the Chinese Government passed a new law providing a framework with respect to e-commerce in China. The full impact of this on ATM’s sales in China is still unclear. ATM recovered most of the ground lost, before again declining sharply when Chief Executive Jayne Hrdlicka sold 357,232 shares in the company to meet tax and other obligations.
ATM ended the month down 10.8%. The top performing company was Comvita (CVT) returning 13.5%. CVT is still the worst performer in the index year to date following a second consecutive poor honey season. However, the outlook for the company has improved with good sales growth in China and North America plus the recent sale of peer company, Manuka Health, at a valuation that gave comfort to investors regarding the value of CVT’s Manuka business.
According to Stats NZ, New Zealand economic activity grew by 1% in the June 2018 quarter, which was above most estimates. This was the largest quarter-on-quarter growth in two years with the biggest contribution coming from service industries.
Policy uncertainty unnerves investors
While it was a positive month for developed markets internationally, the Australian sharemarket underperformed, with the S&P/ASX 200 Index returning -1.3%. Investors were unnerved by the heightened regulatory and political uncertainty, which continues to hang over large parts of the market. The global rally in commodities, in particular oil and iron ore, was supportive for Australian miners and oil producers.
This month, the Financials (-2.2%) sector was the biggest detractors from the market’s performance as the Royal Commission continued to reveal questionable behaviour and serious malpractice by banks and financial services firms. The new Prime Minister, Scott Morrison, unexpectedly took aim at the Aged Care sector and announced a Royal Commission to examine the quality of care being provided and address the widespread reports of negligence and abuse of senior citizens. On the day of the announcement, the ASX-listed Aged Care companies such as Estia Health, Japara and Regis Healthcare suffered heavy losses; all declining by 17% or more. Energy (4.3%) and Materials (4.2%) were the top performing sectors due to stronger commodity markets where both oil (WTI) and iron ore coincidently both rose 4.9%. House prices in Australia fell for the 12th consecutive month with declines of 7.6% and 4.5% in Sydney and Melbourne respectively.
Tough month for global bond markets
Most global bond markets delivered negative returns for September due to rising government bond yields. The impact was most significant in the US where the
10 year government bond yield climbed above 3% and came close to its 2018 high of 3.1%. Economic data in the US remains robust and consistent with the Fed’s
expectations, which led to the Federal Funds rate being increased for the third time this year. A fourth hike in December is looking increasingly likely and the median projection of the Federal Open Market Committee (FOMC) members implies another three for 2019. Most other major central banks left interest rates unchanged although there remains a bias towards tighter monetary policy in Canada, the UK and Australia. The ECB announced a further reduction in the pace of its bond purchasing program (which is expected to cease in December) as was
New Zealand bond yields also rose this month but the move was not as significant, and government bond yields are below where they were three months ago. The reason for this is uncertainty around the direction of monetary policy, with the RBNZ continuing to signal that the next move in the OCR could be up or down. The RBNZ has clearly communicated the downside risks to economic activity in and is prepared to reduce interest rates quickly if required. GDP data for the June quarter was actually stronger than the RBNZ and economists were expecting, but it is the September and December quarter data that will be more significant for monetary policy. With the RBNZ firmly on hold, New Zealand bond markets continue to outperform global bond markets.
This month the S&P NZX Government Bond Index fell by 0.2% and the S&P NZX Investment Grade Corporate Bond Index was flat, however over the last 12 months they returned 4.9% and 4.8% respectively. This compares favourably to the Bloomberg Barclays Global Aggregate NZD Hedged Index that has returned 1.2%.