September Monthly Market Update
As at end of September 2021
In comparison to what has been a relatively serene and resilient year for global equities, September was a rather tumultuous month. Troubling developments in China and a more hawkish tone by central banks dented risk sentiment and caused most major markets around the world to finish lower. The MSCI World (NZD) Index fell 2.2%, which includes the positive currency offset from a weaker kiwi dollar as it declined materially against its major peers.
Aside from the “common prosperity” rhetoric from the Chinese political leadership continuing to overhang mainly large technology companies, developing news of a potential collapse of the major property developer Evergrande, also caused bouts of volatility and unnerved markets. A potential downturn in the Chinese property market is a major systemic risk for the Chinese economy due to high levels of debt and household wealth that is tied to that sector. Given the sheer size of the Chinese economy and its contribution to global GDP, if a domino effect were to eventuate, it could have consequential effects for the rest of the world as well. The Materials sector, a major beneficiary of China’s multi-decade hunger for iron ore and steel to build property and infrastructure due to mass urbanisation, reacted very badly to this development. It was the worst performing sector globally, with iron ore and steel producers, especially those with large exposure to China, being sold-off sharply.
The Federal Reserve announcement that they may start tapering their quantitative easing programme, plus earlier rate hike signalling, was another surprising feature that had an adverse impact on equity markets. Bond yields rose sharply following the announcement, and this had a pronounced negative effect on bondproxy sectors such as Real Estate and Utilities, making them the next worst performers after Materials. Energy was by far the top performer, and the only sector to deliver positive returns. Various energy shocks around the world, due to a variety of supply chain issues and production curtailments, have caused oil and gas prices to rise substantially. Oil prices popped back to 5-year highs with WTI rising 9.5% and finishing above US$75/ barrel. Natural Gas prices surged 34% on low inventory and production concerns in regions such as Europe and the USA, putting extreme upward pressure on electricity production costs and fuelling unease of how energy will be procured for the upcoming winter.
NEW ZEALAND MARKET
Whilst the S&P/NZX 50 Index only made a modest 0.4% return for September, it still managed to outperform most global peers. A key theme amongst the top Index performers was ‘’optimism despite the challenging environment’ . One instance was Synlait Milk rising 12.7% even after reporting a loss near the bottom of its guidance for what has been a very challenging year. What investors liked about the update was the multi-year strategy detailing a return to profitability, which included a material new customer in FY22. In a similar vein, Sanford, after reporting markedly higher operating costs and a reduced profit, still ended up 14.6% due to Ngāi Tahu Holdings increasing its ownership stake to 20% by buying on-market at a significant premium. Kathmandu was the top performer in the Index, returning 16.9% despite its retail stores being impacted by Covid-19 lockdowns on both side of the Tasman. The silver linings were solid performances from the Rip Curl and Oboz businesses, along with expectations of a strong rebound in sales as restrictions begin to ease.
Rising government bond yields continued to put pressure on yield stocks such as the utilities and listed property vehicles (LPVs). All LPVs in the Index had negative returns for the month with Stride Property Group (SPG: -5.8%), Vital Healthcare Property Trust (VHP: -6.6%) and Goodman Property Trust (GMT: -6.7%) all ending near the bottom of the Index. SPG announced the launch of a new Office property fund called Fabric through a demerger and IPO before withdrawing it just a week later. Reasons cited for the withdrawal were volatile market conditions, lockdowns, and the ongoing Evergrande saga in China. The worst performer in the Index was Trustpower (TPW: -8.3%). During the month, shareholders voted and agreed to sell TPW’s retail business to Mercury, with the remaining electricity generation company to be renamed as Manawa Energy.
Bullock Steers Debate
Australia’s benchmark S&P/ASX200 Index returned -1.9% in September, with Materials and Healthcare the worst performing sectors. Notably, Energy bucked the trend with a 16.8% return as a confluence of supply shortfalls in China, Europe, and the UK drove fossil fuel prices higher.
Unsurprisingly, some of the best performers this month were those that are leveraged to oil, gas, and coal prices. Beach Energy delivered a 42.4% return, extending gains after announcing an LNG offtake with BP. Whitehaven Coal and Woodside also performed strongly, up 27.7% and 22.5% respectively. Elsewhere, Flight Centre returned 30.8% in anticipation of Australia’s border being reopened before Christmas; and AustNet, which owns Victoria’s power grid, returned 30.2% on a takeover proposal. The proposal from asset manager Brookfield drew a quick retort from listed pipeline operator APA, that it had been leapfrogged after approaching AustNet weeks earlier. Illustrating deal risk, the month’s worst performer was market software developer Iress, which returned -21% after suitor EQT walked away, having failed to agree on a transaction post extended due diligence.
On the macroeconomic front, two themes dominated this month: ‘interrupted recovery’ and ‘financial stability’. The first was borne out by rebounding growth tempered by lockdown-related labour market distortions. Whilst the August unemployment rate declined to 4.5%, this was due to lower participation. Employment declined 146,000, but this was masked by a greater number exiting the workforce. The second arose at the intersection between the hot-button topic of house prices and a speech by RBA assistant governor Michelle Bullock entitled ‘The Housing Market and Financial Stability.’ Echoing actions taken in New Zealand, there is now talk of macroprudential measures such as Debt-to-Income limits to mitigate systemic risk created by too much credit growth in the housing sector.
All Eyes on the RBNZ
It was another negative month for New Zealand bond markets with the S&P/NZX Investment Grade Corporate Bond falling 0.6% and the S&P/NZX Government Bond Index falling by 1.1%. Government bond yields continued to rise with the 10-year yield breaching 2% at the end of the month, a level not seen since April 2019. Global bond yields were also higher and most international bond markets posted negative returns, with the Bloomberg Barclays Global Aggregate Index falling by 0.9%.
In New Zealand, hopes of a fast containment of the recent COVID outbreak have faded with a steady (albeit low) stream of new community cases being enough to keep Auckland in lockdown. The economic impact of this is still being perceived as relatively minor and not enough to change the outlook for rising interest rates in New Zealand. It is somewhat surprising to see shorter term bond yields continuing to rise despite the economic disruption. For example the 5 year government bond yield finished September at just over 1.5%, which is higher than the 1.4% recorded just before the first COVID case in the latest outbreak was announced in August, and considerably higher than the 1.1% level where it was at the end of June. Current market pricing implies a succession of OCR hikes with the OCR expected to reach 1% by March next year. Interest rates remain very low by historical standards but the expected rate of change is rapid and is already being reflected in rising mortgage rates for homeowners and interest costs for businesses.