Market update: March 2021

What happened

February began with gains in global share markets as investor confidence returned despite highly speculative activity in certain stocks in the prior month. Markets were further buoyed by strong earnings announcements, with many large companies around the world, notably in the US, exceeding analysts’ forecasts.

The accommodative stance of central banks in many economies around the world remained unchanged, although economic data continued to improve. The unemployment rate in New Zealand dropped below 5%, exceeding economists' expectations, however the Reserve Bank kept the official cash rate unchanged at 0.25% at its February meeting.

Global vaccinations, with some positive signs of efficacy, fuelled further hopes for a continued economic recovery. In light of this improved outlook, commodities linked to economic growth, such as oil and copper, increased significantly in price over the month as well. This ultimately led to higher inflation expectations and as a result, global bond yields spiked significantly during the month. The US 10-year yield, in line with many other developed markets, reached levels not seen since before the COVID-19-related market selloff in March 2020, and New Zealand saw one of its worst months ever for domestic fixed income investors.

The sharp rise in bond yields over February also spurred some anxiety among equity investors, which spilled over to some sectors of the market. In part, this also contributed to value investors outperforming growth investors in February. During the last week of the month, offshore share markets gave back earlier gains, led by significant declines in technology stocks.

Looking back

The New Zealand share market, being a highly concentrated market, was pulled down by large declines in four big companies in February. This resulted in underperformance of nearly 10% compared to global markets. New Zealand and Australian shares have also underperformed their global counterparts over the last quarter and year.

Global shares have rallied strongly over the last year. The performance has led to what can be considered a great outcome on a cash adjusted basis, with the one-year return in the top 5% of outcomes over the last 20 years. Although this period does not start at the 2020 trough in equity markets, fiscal and monetary stimulus in the form of lower interest rates and quantitative easing in reaction to the COVID-19 pandemic resulted in very strong performance.

Bond yields continued to rise globally and in New Zealand over the month. Over the last year, this has led to negative, and flat, performance for New Zealand and global fixed income investors, respectively. The returns have been particularly poor for New Zealand fixed income investors over that time period.

The New Zealand dollar appreciated against other major currencies over the month. Over the past year, the New Zealand dollar has increased significantly against the US dollar because of the economic recovery from the pandemic. At the end of February, the NZD/USD exchange rate touched highs not seen since 2018, fuelled by a view that New Zealand is further down the path of recovery compared to other parts of the world.

Meridian Energy (MEL) and Contact Energy (CEN) both dropped significantly over the month. This came after a rally in the New Zealand “gentailers” caused by what some considered to be environmental-related fund flows after the appointment of US President, Joe Biden. However, rising interest rates weighed heavily on these stocks in February.

Meanwhile, Fletcher Building (FBU), rose throughout the month as investors digested their half year results and saw good potential for the company in an economic recovery.

A2 Milk (ATM), having experienced export disruptions in 2020, continued its spectacular decline during the month with disappointing half year results. Against high expectations for a medical device manufacturer, investors were underwhelmed when Fisher & Paykel Healthcare (FPH) released their results, leading to a significant drop in the share price in February.

Prepared by Makao Investments on behalf of Wealthpoint Limited.

Disclaimer: The information in this document is provided for general information only and is not intended as advice. Past performance is not necessarily a good indicator of future returns. Data for this document has been sourced from Refinitiv Datastream, however the information contained herein is not guaranteed and does not purport to be comprehensive.

Market update: February 2021

What happened

The year started with supporters of Donald Trump storming the Capitol on January 6, while the presidential election results were being certified by lawmakers. On the same day the balance of power in the United States Senate also shifted narrowly to the Democrats. Surprisingly, financial markets were unperturbed by both events and share prices and bond yields rose on the day.

Joe Biden was inaugurated later in the month without disruption and proceeded to revert some of Trump’s policies shortly afterwards through a series of executive orders.

Meanwhile, both daily COVID cases and hospitalisations continued to reach new peaks as many parts of the world grappled with new and more infectious strains of the virus. Although this should have been a reason for concern, markets were sanguine amid the varied success of countries rolling out vaccinations.

Oil prices also moved higher, especially at the start of the month on the back of a pledge from Saudi Arabia to cut the output. Furthermore, economic data throughout January surprised on the upside. US jobless claims were lower than expected and China reported that their GDP growth rate had returned to prepandemic levels.

At the end of the month, financial news headlines were dominated by speculative activity in heavily shorted stocks such as GameStop. Although this confrontation between retail and hedge fund investors raised questions surrounding financial regulation, this was for the most part a sideshow for the US share market. However, it did coincide with market giving up gains made earlier in the month.

Looking back

Despite a relatively flat month, returns for shares over the last 3 months have been very strong. Performance for global shares remains “good” in comparison to history over a one-year period, outperforming the more concentrated New Zealand share market for the first time in a while.

The Australian share market has struggled to keep up with global peers over the last year. Larger exposure to cyclical sectors in the economy, such as materials and financial services, acted as a headwind as the market rebound led the economic rebound. Likewise, another cyclical sector, property, has lagged globally amid government-enforced lockdowns to combat the COVID-19 pandemic.

In New Zealand, bond yields ticked up slightly over the month as economic data continued to exceed expectations, dragging the 3-month performance of New Zealand fixed income further into the red. Similarly, bond yields rose in global fixed income markets, however the performance over the last 3 months has remained positive. Over a year, returns for fixed income now look more normal.

The New Zealand dollar closed relatively flat in January, ending the month mixed against other developed market currencies. Other the last year, however, the New Zealand dollar has appreciated against peers, with the notable exception being the cross rate with our closest neighbour, the Australian dollar.

Having performed well in the fourth quarter, Fletcher Building (FBU), continued its upward momentum over the month on the back of hopes for improved margins buoyed by an improving economy. Fisher and Paykel Healthcare (FPH), also squeezed out further gains in January after an update on its operating activity.

Similar to other “gentailers”, Contact Energy (CEN) lost ground in January, after having experienced a strong rally at the end of 2020. While the news that the aluminium smelter at Tiwai point would remain operational for the next 4 years spurred a relief rally earlier in the month, the stock ended up giving back these, as well as earlier gains, and ended in negative territory.

A2 Milk (ATM) continued its recent downward trajectory during the month, having now nearly halved from prices reached in mid-2020. Talks about export disruptions continued to hamper the performance of the stock in January.

Prepared by Makao Investments on behalf of Wealthpoint Limited

Disclaimer: The information in this document is provided for general information only and is not intended as advice. Past performance is not necessarily a good indicator of future returns. Data for this document has been sourced from Refinitiv Datastream, however the information contained herein is not guaranteed and does not purport to be comprehensive.

New Year’s Resolutions

S W Morris & Associates is our risk planning business which complements Trilogy's investment and residential lending advisory business. Cash management is a critical starting point for personal financial planning, mentioned in the New Zealand Herald article below. Over the break I've read a number of articles on how people changed direction in 2020 either in their relationships or vocation. One thing not mentioned in the article below which I had sent to the NZ herald when they asked for my comments, was the importance of revisiting your Investment Risk Profile and ensuring you have a truly diversified investment portfolio. Personally I don't see my family home as being a part of my portfolio of investments. Return on Investment (ROI) is critical to making investment decisions which could be another New Year resolution when making investment decisions in 2021!