A snapshot of the key factors driving the performance of markets and your funds in July 2019
All Fund returns below are after fees & before tax
The NZ portfolio posted returns of 5.2% in July, compared with the local share market which returned +3.4% (S&P/NZX50G). The New Zealand market continued its 2019 ‘clean sheet’ – to put it simply, every month has been positive for the calendar year. New Zealand continues to perform well compared to global markets, supported by low interest rates.
a2 Milk shares returned a stellar +22.8% in the month. We attended Synlait’s investor day, which showcased that a2 has a best-in-class manufacturing partner. The Dunsandel plant where most of a2’s infant formula is manufactured is very impressive in terms of its cleanliness, newness, and levels of automation. It was great to see the infant formula canning line rapidly firing through tin after tin of a2’s Stage 3 product. Synlait commented that unplanned stoppages are now more infrequent which we think significantly increases that actual capacity of the plant above nameplate capacity. This should support a2’s strong volume growth and also creates cost benefits for a2.
Auckland Airport dipped -5.5% during the month, giving back some of the strong recent gains. New Zealand will introduce a $35 International Visitor Conservation and Tourism Levy (IVL) later in 2019 on all international visitor arrivals excluding Australia and the Pacific. At the margin we think this may dampen tourism flows.
The Australian portfolio started the second half of the year on a positive footing, with the portfolio returning 3.5% across the month, ahead of the ASX200 Index which returned +2.9% (in A$).
With most portfolio positions contributing positively to performance, Resmed (+10.7%) was one of the standout performers. Resmed reported strong quarterly financial results in July, with signs that both its masks and devices divisions continue to grow their market share. Its burgeoning software division, assisted by recent acquisitions also pleasingly grew strongly in the quarter.
Rio Tinto (-4.7%) dragged on portfolio performance as concerns over the lack of progress in discussions on trade between the US and China weighed on the global mining sector late in the month.
International stock markets provided positive returns in July, continuing the strong year to date results so far. Equity markets ended up 1% in local terms. After accounting for currency effects, the Fund returns were up 2% in kiwi dollar terms which performed in line with its benchmark.
Equity market sentiment fell towards the end of the month as Wall Street’s ‘Fear Index’ the VIX, spiked. The increase in volatility came on the last day of the month when in the US, the Federal Reserve cut interest rates for the first time in 11 years. The market’s response to the largely expected rate cut suggested that many were disappointed that the cut wasn’t larger. There was positive momentum in economic surprises for both China and the US, while the macroeconomic outlook for the Eurozone deteriorated significantly with weaker than expected data.
Top-performing sectors during the month included Technology Services, Electronic Technology and Consumer Services. Growth outperformed Value once again, with the difference in the two types of stocks valuations reaching extreme levels. In other words, Value stocks have rarely been this cheap. Top contributors to relative returns included having a higher exposure than the benchmark to Vodafone. The stock rose over 13% after they announced a spin-off of its mobile tower infrastructure in addition to selling its NZ operations. Not owning Netflix also boosted relative returns after it was shown that for the first time in 12 years, they lost streaming customers in the US. The news sent the stock into a tailspin, losing 11%. Major detractors included Pfizer which fell 10% after they announced agreed to merge their generic drug business with competitor Mylan, and at the same lowering earnings guidance.
The Kiwi Dollar depreciated against the US dollar and the Japanese Yen, while it rose against the British Pound as Brexit-hardliner Boris Johnson became the new UK prime minister. The combined impact of these FX movements boosted portfolio returns in NZ dollar terms as offshore assets are now more valuable.
Slowing economic activity around the world continues to drive up demand for safe-haven assets and lower yields. The overweight duration position of our portfolios continue to benefit from this. Despite interest rates across much of the world hitting new all-time lows this month, we suspect they have not yet reached the ultimate bottom for this economic cycle.
Slowing growth has not yet translated in wider credit spreads however. In fact, demand for corporate debt remains extremely high at present. This has caused our global fixed income portfolios to mildly underperform their benchmark again this month. We continue to expect weaker corporate earnings will translate into a higher risk premium for corporate borrowers in due course.