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.
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.