What next?
Global share markets were marginally higher in May whilst NZ shares were a notable laggard.
Investors are forward looking, with a constant refrain of ‘what next?’. In that context, many themes that we have followed over the last 6 months or so have already played out and we are searching for our own ‘what next?’. We’ve had the re-opening of global economies; economic growth has boomed and inflation is surging. Share markets have already performed well, and companies previously impacted by COVID-19 restrictions are recovering. Meanwhile, bond markets have settled, i.e. not collapsed in the face of rising inflation – removing, for now, one of our key concerns.
New Zealand’s weaker performance last month can be attributed entirely to the performance of just two companies. a2 Milk’s woes continued in May with the stock down 23.4%. Fisher & Paykel Healthcare fell after disappointing investors with its lack of clarity around the outlook; we continue to like the medium-term story for Fisher & Paykel Healthcare and remain positioned accordingly.
Meanwhile, Australian shares performed well last month, led by the banks. Gold stocks also did well with key holding Evolution Mining up 16.8% in May.
Our expectation is that we have another few months of global economic boom as more economies around the world reopen. Beyond that, the key question is how sustainable the growth and inflation impulses are. There is certainly plenty of fuel in the tanks; global household savings are elevated, government policies are supportive and interest rates remain low.
For equities, both bullish and bearish arguments can continue to be made. The supportive backdrop and lack of attractive alternatives (e.g. bonds/cash) mean that equities remain the only game in town. Against that, a peaking in growth and fiscal (i.e. government) policy support and the threat of tighter monetary policy (rising interest rates) mean that risks are rising. The most likely outcome is a mildly upward trajectory punctuated by bouts of volatility.
In the meantime, our focus remains on finding attractively valued companies. On this front we still have plenty of good ideas to invest in. This allows us to remain invested whilst maintaining flexibility to deal with what comes next.
