Business & investing: What a difference a year makes, as markets here and globally tumble
There’s no sugar coating it. It’s been a brutal start to the year for investors, so much so that many will dub it a Black January.
As share prices tumbled for a fourth week, with no sign yet that prices are bottoming out, the ‘buy the dip’ strategy that has served investors well since the start of the Covid sell-off in March 2020 was noticeably absent in January.
The numbers speak for themselves.
The NZX50 declined 0.5 percent in the first week of January, 1.4 percent in the second, 3.5 percent in the third and 4 percent last week culminating in a fall of 9.6 percent for the month. That compares to a 7.9 percent fall for Australia’s ASX 200 and a 7 percent decline percent for the S&P500 in the US.
However, a late 105-point rally in the US on Friday, its only significantly positive day this month, narrowly avoided what would have been an almost 10 percent decline in its benchmark index year-to-date and the dubious distinction of being the worst January ever (currently January 2009), while the tech heavy Nasdaq is already in correction territory having fallen 11.5 percent year to date.
To put this month’s decline into perspective for the local market, the NZX50 is now back to the level it was at in October 2020 and has already wiped out one fifth of its gains since the market bottom in March of that year.
Shares in Ryman Healthcare fell below $10 on Friday for the first time since the March 2020 Covid selloff and are now down 36 percent from their peak in September last year, while F&P Healthcare, a2 Milk, Chorus and SkyCity shares are all more than 20 percent below their 2021 highs.
The question markets are trying to figure out, which is adding to the current volatility, is straight forward enough but not easily answered just yet. Is this simply a correction or the start of a more pronounced bear market where prices trend lower? If it’s the later then it’s now a case of ‘sell the rally’ rather than ‘buy the dip.’
Bill Gross, the founder and former chief investment officer of US$2.2 trillion fund manager Pimco told the Financial Times over the weekend: “The buy the dip mentality has been obliterated in the market.”
US Federal Reserve changes its tone
While its early days in what could be the beginning of a new market cycle, the US Federal Reserve left investors in no doubt on Wednesday (US time) where it stands.
In its first monetary policy statement for 2022, Fed chair Jerome Powell was uncharacteristically hawkish in his outlook. After months of prevaricating, Powell finally stated the obvious: that inflation is now the central bank’s primary focus and interest rate rises, possibly by as much as 50bp, are all but certain to begin in March.
Powell said the Fed would be “humble and nimble” as it looks to “move steadily away from” the ultra-accommodative monetary policy it put in place in early 2020 shortly after the onset of the Covid-19 shock.
In the space of just a few months the Fed has dramatically changed its tune from previously only seeing the need for a single rate rise this year to markets now pricing in the likelihood of five quarter-point hikes.
Suddenly everything has changed for investors and the fall in share prices in recent weeks reflects a fundamental repricing of stock valuations, particularly those in the tech sector, to take account of this new outlook.
Reserve Bank decision in three weeks
Locally, the Reserve Bank faces a similar dilemma. While our central bank has already begun its tightening cycle with two 25bp rate rises last year, last week's eye watering Consumer Price Index (CPI) showing the annual inflation rate is now 5.9 percent, well above the bank’s own forecasts and outside its mandated range to contain inflation within a 1-3 percent target band, indicating the RBNZ might have some catching up to do.
So could we see the RBNZ hike the OCR by 50bp this month in its first monetary policy statement for the year on February 23?
While it’s an outside possibility, Kiwibank Chief Economist Jarrod Kerr considers such a move unlikely.
“I think the RBNZ has plenty of meetings to lift in 25bp increments without the need for a 50bp hike. The [recently introduced] Credit Contracts and Consumer Finance Act is having a huge impact on housing lending” Kerr said.
Also adding to growing inflation risks is the oil price, which hit another high this past week and is now trading around US$90pb, up 3.4 percent for the week and 17 percent for the month. Oil analysts expect the price to continue rising, particularly given elevated geopolitical risks as Russia threatens to invade Ukraine. The price of oil has now increased almost 30 percent since mid-December.
After spiking higher in recent weeks, the price of gold fell more than 2 percent to below US$1800 following the Federal Reserve’s hawkish tone and led to a sharp rise in the US dollar index which climbed 1.6 percent for the week. That in turn saw the kiwi dollar hit an 18-month low of 65.4 US cents. As the US dollar looks set to push higher, watch for the kiwi dollar to potentially weaken further in coming weeks.
Cryptocurrencies experienced a small bounce this past week, with bitcoin having its best week in a month gaining around 4.5 percent, though for the month its price is down almost 20 percent. Crypto prices are likely to remain under pressure during what is now being described as a “risk off” market.
It all seems so different to this time last year when millions of amateur investors in pursuit of riches, catapulted shares in downtrodden retailer GameStop thousands of percent higher leaving professional fund managers baffled. Now shares in Robinhood, the high profile trading platform of choice for retail traders in the US, are down 85 percent from their August 2021 peak while Gamestop shares have fallen 60 percent in just the past eight weeks.
What a difference a year makes.
The week in review
The consumers price index (CPI), a broad measure of inflation, increased 5.9 percent from the December 2020 quarter to the December 2021 quarter, the biggest movement since June 1990 according to Statistics NZ. Price increases were widespread with 10 out of the 11 main groups in the CPI basket increasing in the year, with only the communications sector decreasing.
The main driver for annual inflation was the housing and household utilities group, with prices for construction and rentals for housing increasing sharply. Prices for the construction of new dwellings increased 16 percent in the December 2021 quarter compared with the same quarter in 2020. Petrol prices increased 30 percent in the year to December 2021 quarter. The average price of 1 litre of 91 octane petrol was $2.45 compared with $1.87 per litre in the December 2020 quarter.
Ebos Group confirmed it had raised $171 million from its retail shareholders after receiving bids worth almost four times what was on offer. The healthcare and animal care products distributor initially sought $105m from retail investors having already raised $674m in a placement to institutions to help fund its purchase of LifeHealthcare. Shareholders applied for a total of $412m of new stock. As a result, Ebos expanded the size of the retail offering to accept an extra $66m, selling five million new shares at a price of $34.50 apiece.
Fulton Hogan announced plans to expand its Australian business telling staff it was seeking to acquire a 50 percent stake in roading company Stabilised Pavements of Australia (SPA). Based in Somersby, New South Wales, SPA was founded in 1984 and specialises in pavement construction, upgrades, and maintenance for councils and other clients.
Tourism Holdings is set to expand its manufacturing footprint announcing plans to acquire MaxiTRANS from Australian Trailer Solutions Group in a $5.7 million deal expected to be completed at the end of this month. The NZ MaxiTRANS heavy transport manufacturing business employs 50 people and is projected to have general revenue of approximately $18m in the 12 months ending June 30. Tourism Holdings said the acquisition will be settled from existing credit lines.
a2 Milk shares surged more than 7 percent last week, trading as high as $5.90 following yet another round of media speculation that a takeover bid for the out of favour dairy manufacturer was in the pipeline. The Australian newspaper speculated that Canadian dairy giant Saputo was planning a takeover bid for the company, though neither Saputo nor a2 Milk were willing to comment on the report. By week’s end a2 Milk shares had retreated back to $5.60 having traded as low as $5.31 in recent days.
Green Cross Health shares lifted 5.2 percent after the healthcare company said Covid-19 had boosted revenue through the tail end of 2021 but warned that the improvement might be a one off. Green Cross chief executive Rachael Newfield said the company’s revenue climbed 14 percent in the nine months ended Dec 31 compared to the same period a year earlier. The company expects net profit to exceed last year’s $16.8 million by between $4.5m and $6.5m in the 12 months ending March 31.
Fonterra lifted the midpoint of the range it plans to pay its farmers to a record $9.20 per kilo of milk solids with hot demand and constrained supply. It lifted the range for the 2021-22 forecast farmgate milk price to NZD $8.90-$9.50 per kgMS, up from NZD $8.40-$9.00 per kgMS. The new midpoint is expected to contribute around $13.8 billion to the New Zealand economy this season. CEO Miles Hurrell said the increase is the result of “consistent demand for dairy at a time of constrained global milk supply.”
Synlait Milk also lifted its forecast base price payout for suppliers by 16 percent on strong demand. It now expects to pay suppliers a base price of $9.25 per kilogram of milk solids (KgMS) in the 2021-22 season, up from $8.00 previously. CEO Grant Watson said the jump reflects a strengthening in dairy commodity prices globally as a result of strong demand.
The Reserve Bank said it had appointed Karen Silk as assistant governor and general manager of economics, financial markets and banking, although her actual start date is still to be confirmed. Silk, whose most recent role was as a general manager leading the design and delivery of products and services for Westpac's NZ customer base, will fill the role previously held by Christian Hawkesby who is now deputy governor.
Coming up this week
Tuesday
- Overseas Merchandise Trade (Dec) – Stats NZ
Wednesday
- Tower AGM
- Labour Market Stats (Dec qtr) – Stats NZ
Friday
- Building Consents (Dec) – Stats NZ
