The past month has seen positive returns for all asset classes, this is on the back of economic data indicating that central banks’ actions may be working. The hopes that the slowing economic growth outlook may result in an easing of monetary tightening, coupled with broadly positive earnings results also contributed to the upbeat sentiment for the month of July.
Inflation continues to be a talking point with no clear signs of peaking just yet. The rate hike of 0.75% of the US Federal Reserve (Fed) indicates there are still inflationary concerns, but there has been less hawkish commentary from Fed chair Powell stating that “at some point rate hikes will slow down”. This was received positively and that sentiment filtered through to markets.
The Reserve Bank of New Zealand (RBNZ) and the Reserve Bank of Australia (RBA) both increased rates by 0.5% in July to 2.5% and 1.35% respectively with further tightening expected. The Bank of England increased rates by 0.25% to take rates to 1.25% in the UK while their Prime Minister Boris Johnson put in his resignation amidst heightened political uncertainty. The European Central Bank increased rates by 0.5% for the first time in 11 years to cool rampant inflation.
Much of the rate hike action of central banks has been baked into markets and the surprises of the higher than expects actions has less of an impact and the expectation are longer term focused.
The International Monetary fund (IMF) downgraded the global outlook for growth from 3.2% for 2022 to 2.9% for 2023 and increased the inflation forecast. This gave markets an indication that actions of the respective central banks could be filtering through to the overheated economies and higher inflation expectations could ease.
Fixed income markets benefited from falling sovereign yields and tighter credit spreads. The US 10-year treasury yield fell 22 basis point for the month. With the NZ 10-year falling 29 basis points.
Asset class performance to 31 July 2022
Annual performance to the end of July 2022 has been poor from all equity assets. All asset classes bucked the downward trend over the month, with Global Shares up 7.1%, as the severity of interest rate hikes was assessed to be lowering. The New Zealand & Australian share markets follow suit with better performances but underperformed global peers, both finishing up 5.7% for the month. The positive performance since the June lows as been spurred on by betterthan-expected CPI data which reduced the risk of central banks hiking rates.
New Zealand and global fixed income rose higher during July, as the expectation for central bank tightening eases along with the 10-year yield on US treasuries dropping to 2.65% after a June high of 3.5%. NZ 10-year treasury yields dropped 29 basis points.
Both asset classes returned just under 3% over the month as bond yields slid. However, with historically high inflation, their one-year performance continues to be bad relative to the last twenty years.
New Zealand Dollar to 31 July 2022
New Zealand shares
The New Zealand equity market finished positively for July, with all the NZX10 stocks in the green. This is on the back of better market sentiment and good news stories for a few key names. Mainfreight (MFT), the biggest outperformer in July, led the uptrend with an 11.4% rise. With most of the growth coming late in the month on strong performance data at the annual share holders meeting indicated very strong numbers for 2022.
Infratil (IFT) much like the rest of the NZX top 10 had a very good month with most of the returns coming toward to the end of the month on the back of big corporate announcements. Vodafone together with shareholders Infratil sold passive mobile tower assets for $1.7 billion.
Telecommunications company Spark (SPK) performed well through the month by selling a 70% stake in its mobile phone tower network TowerCo to the Ontario Teachers’ Pension Plan Board. The transaction values the TowerCo business at $1.175 billion. Representing a pro-forma multiple of 33.8x with net cash proceeds of $900 million.
The information in this update 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 Morningstar Direct & RBNZ, however the information contained herein is not guaranteed and does not purport to be comprehensive.