Market Review: NZ continues to be out of step
With 2002 mostly behind us, Guardian Trust Funds Management managing director Anthony Quirk gives his views on the state of the markets.
Tuesday, December 3rd 2002, 11:07AM
by Anthony Quirk
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This market summary is provided by Guardian Trust Funds Management. To see how the numbers stacked up for various markets around the world in the past month and over the year, visit our Monthly Market Review here |
One of the features of financial markets for the 2002 year has been the dichotomy between the NZ economy, interest rates and its sharemarket when compared with its offshore counterparts.
The reasons for this are widely documented and relate to the impact of a buoyant agricultural sector, which benefited from a weaker Kiwi dollar and relatively strong agricultural product prices in 2001. This, combined with high net migration inflows, low unemployment levels and strong house prices, has helped boost activity and confidence levels in 2002 for most NZ urban centres. This underpinned corporate profitability in this country, which has also contributed to a strong relative outperformance from the NZ sharemarket for much of this year.
This situation was the mirror image of most of the major economies such as the US, Japan and Germany that were grappling with rising unemployment, falling business and consumer confidence levels and collapsing sharemarkets.
However, over the past two months there are signs that things may be reversing somewhat. For example, global sharemarkets are up 13.1% in local currency terms (as measured by the MSCI World Index, with net dividends reinvested) for the past two months, while the NZ sharemarket is down 0.6% (as measured by the NZSE40 Gross Index) over this same time period. Compare these with the respective figures for the year to 30 September – the MSCI World Index was down 21.0%, while the NZSE40 Gross Index was up 13.2%.
What is behind this large change in relative performance?
While the global economy still looks fragile and uncertainties abound, sentiment has definitely picked up from the depths it reached in September. While it is hard to argue for any bull market resumption, investors are now saying some quality companies have been oversold and many stock prices are now well up from their lows. An increasing number of positive comments from companies in the technology sector has helped the NASDAQ Index rise over 26% in the past two months. The accommodating attitude of the US Federal Reserve with their 0.5% interest rate cut during November also contributed to better global sharemarket levels.
On the other hand, after a strong earnings period, some NZ companies produced “negative” earnings surprises, including Telecom, Tower and Baycorp Advantage. The significant falls in these three stocks at the time of their announcements show what little patience investors currently have in such situations. This took some of the “fizz” out of our sharemarket, as did the “double whammy” for the rural sector of lower commodity prices and a higher Kiwi dollar. While the former has reversed (for example, dairy prices are now off their lows), the latter looks likely to be with us for a while.
A mildly interesting comparison of the figures above is found by looking at the similar results for the 2001 year. For the year to September 2001, the MSCI World Index fell 27.6% in local currency terms. However, for the following two months, it rose 8.9%. Hence it is a similar pattern of reversal over the two months of October and November. The difference from 2002, though, is that the NZSE40 Gross Index produced the same pattern of a fall for the year to September (-2.8%), followed by a strong rise in the following two months (+12.5%), significantly outperforming the MSCI World Index over both periods.
Turning to just the November 2002 month’s performance, NZ investors who had diversified into overseas asset classes would certainly have been pleased with the results. In unhedged NZD terms, the MSCI World Index returned 2.7% for the month, while overseas bonds (as measured by the Lehman Brothers Global Aggregate Index) returned 0.5% when fully hedged back to NZD terms. Locally there was a 0.2% return for domestic bonds (as measured by the CSFB NZGS Index) and a 0.5% cash return (from the CSFB 90-day Bank Bill Index). The only major asset class with a negative performance for the month was domestic shares, with the NZSE40 Gross Index falling 2.9%.
The strong MSCI performance mainly arose in the latter half of the month, with improving economic data coming out of the US. The better sharemarket performance and economic information placed pressure on bond yields, with the US 10-year Treasury bond yield rising 0.2% over the month. However, the NZ 10-year Government bond yield only rose 0.1%. While NZ bond yields have not been moving out of step with the rest of the world in 2002 (as share returns have), they have not been moving anywhere near as much as those in the US.
When US bond yields fell over most of 2002 to their lowest levels in 40-odd years, NZ bond yields did not fall as far, held up by NZ’s tighter monetary policy and better economic environment. This resulted in the yield spread (or differential between NZ and US bond yields) rising to its highest level in about 10 years. As expected, when US yields rose again, NZ yields did not rise as much, so the spread contracted.
With summer finally arriving and the NZ markets winding down for the holidays, NZ will likely continue to be out of step with global markets in the December month. On that note, we wish all readers a Merry Christmas and a safe and prosperous 2003.
To see how the numbers stacked up for various markets around the world in the past month and over the year, visit our Monthly Market Reveiw here
Anthony Quirk is the managing director of Guardian Trust Funds Management
Anthony Quirk is the managing director of Guardian Trust Funds Management.
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