The month of October has seen the S&P/NZX 50 Gross Index fall 5.4%, the NZX’s worst calendar month performance since May 2010.
Unlike most global equity market falls in the past, New Zealand has been an underperformer compared with global stock markets in October. For example, in Australia the S&P/ASX 200 Accumulation Index was down 2.2% in October, the United States S&P 500 Index was off 1.8%, Europe’s EURO STOXX 50 Index was up 1.9% and the Japanese Nikkei 225 Index appreciated by 5.9%.
It is worth noting that from a fundamental economic standpoint, very little has changed. Globally, growth has been edging higher although the global growth outlook remains tepid. Inflation has moved higher from a very low base but it remains well below most central bank target ranges. The NZ economy has been boosted by the rebound in dairy prices to complement the strong growth in the tourism and construction sectors. A reflection of this is NZ shares returning 31% to the year ending 31 August 2016.
So what caused the October sell-off?
- There were stock specific issues in NZ – Sky City had a poor trading update, Trade Me has competition fears from Amazon in Australia and Fisher & Paykel Healthcare’s share price fell on patent litigation concerns. These three companies represented approximately 30% of the decline of the S&P/NZX 50 Gross Index in October.
- Global investors have become overexposed to global ‘income’ shares, mainly high dividend yield companies, and fears about rising interest rates have caused a ‘rush for the exits’ from these investors. This resulted in these types of shares falling sharply in the past month.
Expectations going forward
We have been expecting increased volatility in markets and our funds have been positioned cautiously, either through elevated levels of cash holdings or through hedges to protect against rising global interest rates. As a result, our fund performances have generally been better than the performances of underlying markets.
We remain optimistic on the outlook for growth both locally and globally and are constructive on the medium term outlook for local, and to a lesser extent, global shares. It is worth noting that the recent share price declines mean that valuations are more attractive than they were a month ago.
Furthermore, although we expect inflation to continue to tick higher, we do not expect it to move significantly. Accordingly, we don’t see global interest rates moving much higher; indeed we expect the Reserve Bank of New Zealand to cut its OCR rate at its next meeting on 10 November.
However, we acknowledge that there are risks to our view with the most immediate being the US election.
It is unlikely that markets will recover before the outcome of the US election is known and headlines between now and then are likely to drive more volatility. For that reason, we remain conservative in our positioning of the funds and will look for opportunities to invest once we have greater confidence about the US political outlook.
The Milford Team
Disclosure of interest: Milford Funds Ltd holds shares in Sky City, Trade Me and Fisher & Paykel Healthcare on behalf of clients.
Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.