The What, the How, and the Why

After watching shares slide sideways, are a Santa rally and a sugar rush around the corner for Kiwis? Greg Smith analyses the quarter in the markets and finds reasons to be cheerful.

Kiwi investors can look back on the September quarter with some fondness, after the NZX50 index rose 4.9 per cent. This compares favourably with many global indices which gained less than 0.5 per cent, including the S&P500 in the US, and the ASX200 across the Tasman.

We saw this outperformance despite the arrival of the Delta variant in mid-August. Investors took the renewed ‘stay-at-home’ orders in their stride, thinking “we’ve been here before”, and expecting the economy to be resilient and bounce back strongly on the other side of the lockdowns.

We’re more positive

Positive economic data supported this feeling. The June quarter gross domestic product (GDP) showed the economy growing at a better than expected 2.8 per cent, while the unemployment rate dropped to 4 per cent. Ultra-low interest rates helped propel house prices further, making homeowners and many consumers feel wealthier. Closed borders (including the trans-Tasman bubble) meant Kiwis boosted their savings through the quarter – and spending generally. This positivity about the economy was seen across the corporate sector as companies started to report their annual earnings during August. Earnings growth was generally robust. Strong pent-up demand and digitally driven growth were among the main themes, along with supply chain challenges and price inflation. Even companies affected by border closures were optimistic about the light at the end of the tunnel, as vaccination rates started to climb.

The winners

One of the big winners from the pandemic, transport and logistics company Mainfreight, was the top performer, surging around 27 per cent for the quarter. Fuel supplier Z Energy wasn’t far behind, rising 25 per cent, following a takeover bid by Aussie fuel company Ampol. Globally, mergers and acquisitions activity (M&A) was up through the quarter, continuing a trend we’ve been seeing in 2021. The local market did well, despite a number of potential offshore headwinds that could have upset the applecart. The Chinese economy was in the spotlight as property developer Evergrande teetered on the brink of failing. At the other end of the scale, there were rising inflationary pressures as the global economy rebounded. This thrust the spotlight on when the US Federal Reserve, and other central banks, would start to remove stimulus. After a Delta-induced delay, in October our own Reserve Bank of New Zealand raised the official cash rate (OCR) for the first time in seven years. It decided it was time to deliver its own ‘vaccine’ against inflationary pressures, which have been mounting. This rise was confirmed by a ‘hot’ read on annual price inflation. The cost of goods and services went up 4.9 per cent in the September quarter, the biggest jump since 2011. Our central bank was one of the first in the world (beaten only by Norway) to raise rates and this, along with the prospect of ongoing rate hikes, lifted the Kiwi dollar. But this also arguably contributed to our stock market trading in a ‘sideways’ fashion through the start of the final quarter.

Meanwhile the US indices were hitting regular record highs, driven by strong US corporate earnings reports.

What about this quarter?

The NZX50 has, in fact, struggled to get back to the pre-pandemic highs of January last year. But could it finish 2021 with a spring in its step? There are reasonable foundations to believe it will, and not just because historically the later part of December is usually strong. The concept of a ‘Santa rally’ in the markets is based on the view that investors are typically in a cheerful mood this time of year. The extended lockdown in Auckland and periodic restrictions in other regions have come at a time when much of the rest of the world has been pressing ahead over reopening plans. But a rising vaccination rate and a pivot away from elimination has New Zealand on the same path. This, along with financial support for those affected, has helped make sure that levels of business activity and investment have stayed robust, even when confidence has waned slightly.

Sugar rush?

We could well see a consumer ‘sugar rush’ again as the country emerges from lockdown. This will be important for retailers as we enter the critical Christmas trading period. Any trading updates in the weeks ahead will be closely scrutinised. The third quarter GDP numbers will show us the toll the lockdowns have taken on the economy, and it will not be pretty – a contraction of around 5 per cent is forecast. Being forward-looking, the stock market will however be more focused ahead, on ‘sighters’ (such as confidence indicators) around the potential rebound, and as largescale lockdowns become a thing of the past. News around the wider reopening of our borders will be important, because it will finally give some respite to the beleaguered travel and tourism sector.

This will be welcome, giving a further boost to economic sentiment following the landmark trade deal with the UK.

Watch those interest rates

It’s worth keeping an eye on interest rates, and not just if you have a mortgage. Rising inflationary pressures could see other central banks bring forward their tightening plans. A lift in global long-term bond rates can often cause the market to wobble, but equally see a tilt away from high-priced growth names to companies with strong value propositions. This could be good for many of the companies within the NZX50.

Greg Smith is the Head of Retail at Devon Funds Management www.devonfunds.co.nz

Definitions:

Gross domestic product (GDP):

GDP is a measure of a country’s market value. It covers all goods and services produced within a timeframe and can be used to compare nations. Official Cash Rate (OCR): The OCR is a tool used to influence the price of borrowing money in New Zealand. It gives the Reserve Bank a way of shaping New Zealand’s level of economic activity and inflation.