Investment Insight | Spring has sprung
Spring has sprung, and we are excited about the investment opportunities for the remainder of the year. In the first Investment Insight of each month we will look back at the key themes and trends for the previous month; and forward, setting out our views on what will affect client performance in the months to come.
Month in review - active management positive for shares
Clients’ growth portfolios performed well in August. This was driven by a combination of strong share markets but also by individual share selection. August is typically a busy month for United States companies’ second quarter earnings announcements. In New Zealand and Australia, companies report their June year end results. Our large New Zealand and Australian shareholdings all reported very positive results, a key driver of performance in August.
In our Investment Insight | 19 July 2021 | Famous Five we summarise the mega-cap technology companies owned in clients’ growth portfolios. These companies reported their second quarter results at the end of July. Despite these results exceeding market expectations, the initial share price reaction was disappointing, topping off a difficult run of performance for clients’ growth portfolios.
We remained undeterred. Our research confirmed that these large, profit generating, high cashflow companies with large moats would recover. This proved to be the right decision and strong, positive share price momentum came progressively throughout August. The share price increases across the mega-cap technology companies ranged from 4 – 8% in just one month.
In New Zealand, strong performance was witnessed across multiple sectors. Retirement village operator Summerset reported record earnings, and the share price gained 19% in the five days following its August announcement. Chorus’ share price was up 14% in August, driven by a positive regulatory announcement regarding the value of its fibre network.
Post month end, Mainfreight rallied to just shy of $100 per share, doubling its share price since October last year, due to the company’s attractive long-term growth opportunities in the United States and Europe. Across the ditch, Telstra, the largest Australian telecommunications business, reported results that signalled a return to earnings growth, with the share price rising 5% in the following days.
Delta and delay in bonds
For fixed-income markets, August can be summed up by two words - Delta and delay. Around the world the focus for fixed-income markets is on how and when central banks will reduce the monetary stimulus that they have provided, in the form of ultra-low interest rates and asset purchases.
Locally the Reserve Bank was ready to pull the trigger and increase rates, however the emergence of the Delta variant in New Zealand delayed the expected rise in the Official Cash Rate.
NZ Funds’ outlook
Share market
Looking forward, our share market outlook is positive. Favourable tailwinds, which haven’t changed since April 2020, continue to drive share markets higher. These include strong economic growth, continued fiscal and monetary stimulus, record high investor inflows and the relative attractiveness of share market returns versus bonds and cash.
However, we remain cautious and somewhat defensive in the sectors in which we are invested. Share market valuations continue to increase to levels that are at the upper end of historical ranges. In fact, the United States’ S&P 500 Index has gone over 200 consecutive days without a selloff of more than 5%. Historically, it is very rare for the S&P500 to exceed 250 days without a selloff more than 5%.
As the United States nears the point at which it begins to unwind its monetary support, the risks of market volatility and share market pullbacks increase. This has led us to take a more defensive approach to our share allocations with reduced share market exposure and a reweighting from higher risk companies to more defensive companies including large, profitable technology companies and infrastructure and utility companies.
New market reality
Our investment approach means we’re not limited by asset class. As a result, we can seek out growth opportunities, wherever they may be in the financial markets. This means we can invest in currencies, commodities, cryptocurrencies, futures contracts and options, alongside the traditional building blocks of our portfolios – shares and bonds
Commodities soaring
In July, we saw commodity prices pull back from their highs. August has seen a revitalisation with commodities ranging from aluminium to coffee posting record highs. In Investment Insight | 22 June 2021 | Commodities Super cycle we discussed our views as to why we think commodities may be entering a super cycle. We are convinced that having some exposure to this theme will provide uncorrelated returns to a fully valued share market while benefiting from the resurging global economy. Clients’ growth portfolios have exposure across a number of commodities including aluminium, clean tech and natural gas as it replaces coal across Europe and the United States.
Where to for interest rates?
The COVID-19 Delta variant is also delaying the impact in the United States and Europe on central bank decisions. This has meant that interest rate markets continue to be relatively range-bound. However, the pressure is growing that interest rates will need to move higher over the latter part of 2021 as supply shortages emerge across many product and labour markets.
Returns are always measured and reported retrospectively, and don’t guarantee future performance – positive or negative. While the last few months have been difficult, August has been a turning point and our research suggests there is ample opportunity to generate strong and sustainable returns.
Month in review - active management positive for shares
Clients’ growth portfolios performed well in August. This was driven by a combination of strong share markets but also by individual share selection. August is typically a busy month for United States companies’ second quarter earnings announcements. In New Zealand and Australia, companies report their June year end results. Our large New Zealand and Australian shareholdings all reported very positive results, a key driver of performance in August.
In our Investment Insight | 19 July 2021 | Famous Five we summarise the mega-cap technology companies owned in clients’ growth portfolios. These companies reported their second quarter results at the end of July. Despite these results exceeding market expectations, the initial share price reaction was disappointing, topping off a difficult run of performance for clients’ growth portfolios.
We remained undeterred. Our research confirmed that these large, profit generating, high cashflow companies with large moats would recover. This proved to be the right decision and strong, positive share price momentum came progressively throughout August. The share price increases across the mega-cap technology companies ranged from 4 – 8% in just one month.
In New Zealand, strong performance was witnessed across multiple sectors. Retirement village operator Summerset reported record earnings, and the share price gained 19% in the five days following its August announcement. Chorus’ share price was up 14% in August, driven by a positive regulatory announcement regarding the value of its fibre network.
Post month end, Mainfreight rallied to just shy of $100 per share, doubling its share price since October last year, due to the company’s attractive long-term growth opportunities in the United States and Europe. Across the ditch, Telstra, the largest Australian telecommunications business, reported results that signalled a return to earnings growth, with the share price rising 5% in the following days.
Delta and delay in bonds
For fixed-income markets, August can be summed up by two words - Delta and delay. Around the world the focus for fixed-income markets is on how and when central banks will reduce the monetary stimulus that they have provided, in the form of ultra-low interest rates and asset purchases.
Locally the Reserve Bank was ready to pull the trigger and increase rates, however the emergence of the Delta variant in New Zealand delayed the expected rise in the Official Cash Rate.
NZ Funds’ outlook
Share market
Looking forward, our share market outlook is positive. Favourable tailwinds, which haven’t changed since April 2020, continue to drive share markets higher. These include strong economic growth, continued fiscal and monetary stimulus, record high investor inflows and the relative attractiveness of share market returns versus bonds and cash.
However, we remain cautious and somewhat defensive in the sectors in which we are invested. Share market valuations continue to increase to levels that are at the upper end of historical ranges. In fact, the United States’ S&P 500 Index has gone over 200 consecutive days without a selloff of more than 5%. Historically, it is very rare for the S&P500 to exceed 250 days without a selloff more than 5%.
As the United States nears the point at which it begins to unwind its monetary support, the risks of market volatility and share market pullbacks increase. This has led us to take a more defensive approach to our share allocations with reduced share market exposure and a reweighting from higher risk companies to more defensive companies including large, profitable technology companies and infrastructure and utility companies.
New market reality
Our investment approach means we’re not limited by asset class. As a result, we can seek out growth opportunities, wherever they may be in the financial markets. This means we can invest in currencies, commodities, cryptocurrencies, futures contracts and options, alongside the traditional building blocks of our portfolios – shares and bonds
Commodities soaring
In July, we saw commodity prices pull back from their highs. August has seen a revitalisation with commodities ranging from aluminium to coffee posting record highs. In Investment Insight | 22 June 2021 | Commodities Super cycle we discussed our views as to why we think commodities may be entering a super cycle. We are convinced that having some exposure to this theme will provide uncorrelated returns to a fully valued share market while benefiting from the resurging global economy. Clients’ growth portfolios have exposure across a number of commodities including aluminium, clean tech and natural gas as it replaces coal across Europe and the United States.
Where to for interest rates?
The COVID-19 Delta variant is also delaying the impact in the United States and Europe on central bank decisions. This has meant that interest rate markets continue to be relatively range-bound. However, the pressure is growing that interest rates will need to move higher over the latter part of 2021 as supply shortages emerge across many product and labour markets.
Returns are always measured and reported retrospectively, and don’t guarantee future performance – positive or negative. While the last few months have been difficult, August has been a turning point and our research suggests there is ample opportunity to generate strong and sustainable returns.
Source: Bloomberg.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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James Grigor is Chief Investment Officer for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. James' comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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