INVESTOR HUB
October Monthly Market Update
As at end of October 2022
INTERNATIONAL EQUITIES
Wishful Thinking
After a torrid year, much of it caused by central banks rapidly raising rates to contain inflation, a glimmer of hope began to emerge that the current global tightening cycle may soon be coming to an end. Despite inflation remaining at elevated levels across many parts of the world, there were a number of surprising dovish policy announcements by major central banks over the month. Both the Bank of Canada and the Reserve Bank of Australia (RBA) delivered smaller than expected rate hikes, meanwhile the European Central Bank softened its tone in regard to future hikes, citing concerns that additional increases could hurt the outlook for growth. Importantly, talks of a potential pivot by the US Federal Reserve (Fed) began to permeate through markets, with this belief becoming further entrenched after a number of Fed officials said they are considering slowing the pace of monetary tightening in order to avoid a sharp economic contraction. The expectation of a potential downshift in the US monetary policy was enough to lift sentiment and cause global equities to stage a strong rally into month end. The MSCI World (NZD) Index finished higher with a return of 4.4%, where the currency impact, in contrast to most of this year was a net detractor to offshore returns. The kiwi dollar, which tends to correlate to global risk appetite, was the second-best performer in the G10 currency basket, while this year’s top performing currency, the US dollar, was the worst.
Not all of the market’s attention this month was devoted to central banks. The start of the corporate earnings season was closely watched by investors looking for any signs of consumer weakness or cost pressures stemming from higher inflation. Of the companies in the S&P 500 Index that reported during October, the results were mixed. The only sectors that managed to exceed estimates and see a meaningful positive market reaction were Energy and Consumer Staples. The Energy sector, due to tight conditions in global oil markets performed well on the back of exceptionally strong cash flow generation. Companies like Walmart and Kroger reported strong operating performance on better inventory management and consumers switching discretionary spend towards essentials within the Consumer Staples sector. While the rest of the market reported financial results that were broadly in line, market reaction was somewhat muted due to cautious management commentary or negative revisions to future guidance. One of the more notable features during the reporting season was the sharp sell-off in large and dominant technology companies such as Alphabet, Amazon and Microsoft. Alphabet’s core advertising business saw weakness over the quarter, where Amazon and Microsoft gave a weaker than expected guide for the final calendar quarter of the year. Despite their large influence on the direction of US benchmarks, the S&P 500 Index still managed to make a solid return of 8.1% for the month.
NEW ZEALAND EQUITIES
Inflation Staycation
The local sharemarket enjoyed a solid rally in the latter part of the month as the S&P/NZX50 Index returned 2.5% for October. This was a welcomed result post the September pullback, but the New Zealand market was a noticeable underperformer compared to global markets. Inflation was again top of mind as the NZ CPI remained stubbornly high at 7.2%, well above the RBNZ’s expectation of 6.4%. This all but guarantees that the trend of large OCR hikes will continue well into next year.
Even as the cost of living keeps rising, it appears New Zealander’s pent up demand to travel sooner rather than later remains strong as seen in recent updates from travel and leisure companies. Air New Zealand (+9.1%), was a beneficiary of an industry wide lift after Australian peer, Qantas, announced that first half earnings are expected to be back in the black. Locally we also saw profit upgrades from both Auckland Airport and Tourism holdings returning +7.7% and +31.8% respectively, the latter ending as the top performer in the Index. Other notable news came from church payment software company, Pushpay, ending up 13.6% after the company’s board recommended that shareholders accept a takeover offer at $1.34 per share. On the other end of the bourse, the impact of rising interest rates and negative house price sentiment could be seen in the aged care sector as all four providers in the Index ended with negative returns. Summerset and Arvida both saw double digit red, returning -10.2% and -12.5% respectively. Small cap tech companies Eroad (-17.9%), and Pacific Edge (-14.0%,) fell from the September highs, ending as the worst performers for the month.
AUSTRALIAN EQUITIES
An October Sizzler
Australian equities rallied in October, following offshore moves on optimism central banks may slow the pace of future rate hikes. The benchmark S&P/ASX200 Index made a solid return of 6.0%, almost paring back the sharp loss from the month prior.
Across the key segments of the market, the top performers were Financials (+12.2%) and Energy (+9.5%). Banks outperformed as investors increasingly began to price in meaningful margin upside from rising rates while the provisioning for bad and doubtful debt remained relatively low. Energy stocks were buoyed by a sharp bounce in global oil prices (WTI +8.9%), reflecting USD weakness (as oil is priced in USD terms) and OPEC’s announcement of a symbolic pledge to make a 2mb/d cutback in production (i.e. approximately 2% of global demand).
The worst performers in the market were Consumer Staples (-0.2%) and Materials (-0.1%). Consumer Staples were dragged lower by major grocery food chains such as Woolworths and Coles posting soft quarterly sales as they cycle through high 2021 lockdown comps.
Across Materials, major mining companies such as BHP and Rio Tinto were under pressure following a collapse in iron ore prices (-17.5%) due to a worsening demand outlook as the Chinese President, Xi Jingping, offered no immediate resolve to China’s zero-Covid policy stance during the 20th Party Congress.
In terms of macroeconomic news flow, it was an eventful month with a number of surprises which stirred up volatility. Earlier in the month the RBA surprised markets by lifting the cash rate by just 25bp to 2.6%, signalling the hurdle for future 50bp hikes will be very high. This helped lift sentiment in the equity market. While this hike was below the market’s expectation of a 50bp increase, the pace of monetary tightening taken this year is the most aggressive since the mid-90s. Unfortunately for the RBA, the inflation print that came out later in the month was exceptionally strong. The headline annual CPI reading came in at 7.3%, much higher than expected, causing the market to re-price a slightly higher future peak rate of almost 4%.
FIXED INTEREST
Thinking Fast and Slow
Bond yields initially moved higher in October before retracing at the prospect of central banks potentially slowing the pace of rate hikes. The RBA and the Bank of Canada are the first central banks to surprise with a step down in hikes, moving up by 0.25% and 0.5% respectively, both against consensus. This led bond returns into positive territory for the month with the S&P/ASX Australian Government Bond Index up 1.0% and the S&P/NZX Government Bond Index up 0.9% in Australia and New Zealand, respectively. Corporate bonds for the region lagged the government bond sector as credit spreads widened over the period.
With no monetary policy announcements from the Fed in October, rising inflation data was once again the focus. A survey beating US headline CPI of 8.2% y/y was underpinned by increasing core CPI at 6.6% y/y for September. In New Zealand, headline CPI for Q3 printed at 7.2% y/y, well above the latest RBNZ forecast of 6.4% y/y. The RBNZ was expecting lower tradables (imported) inflation this quarter that didn’t eventuate, partly because the NZD was lower than expected. Non-tradables inflation also came higher than expected and has accelerated from last quarter with domestically generated inflation not yet responding to the RBNZ OCR hikes to date. Meanwhile in Australia, Q3 headline CPI jumped to 7.3% y/y driven by accelerations in housing, food and transport. Whilst this was a market surprise, it remains below the RBA’s updated peak inflation forecast of 8% by year end and part of the rationale behind the smaller move in cash rates.
As declared in April, New Zealand government bonds will be included in the FTSE-Russell World Government Bond Index (WGBI) from 1 November. Leading up to the index rebalance at the end of the month, inflows from offshore investors that track the WGBI may have provided an additional boost to local government bond performance. NZDM also announced an inaugural green bond (the Zespri) issuance due in November which will provide further liquidity to the local market.
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