Delta fails to dampen equity markets

Key points

• The MSCI All Country World (global shares) Index rose 2.4% (in USD) in August, buoyed by positive earnings momentum and a more dovish than expected US Federal Reserve.
• The New Zealand earnings season was strong with beats outnumbering misses 2 to 1. This helped drive a strong 5% return for the S&P/NZX 50 index over the month.
• Chinese economic momentum looks to have stalled in recent months. Both Caixin and broader PMIs missed consensus estimates during the month, with the non-manufacturing side of the economy particularly weak.
• The outbreak of Covid-19 in the community scuppered the Reserve Bank of New Zealand’s (RBNZ) plans of a rate rise in August. The tone of the RBNZ remains hawkish which saw bond yields rise across all maturities during August. This caused market returns to be negative with the Bloomberg NZ Bond Composite 0+Yr Index returning -1.0% over the month.

Key developments
Despite delta’s impact, global equity markets were upbeat reflecting a reporting season which showed positive earnings growth and confirmation by the US Federal Reserve (the Fed) that it would err on the side of caution in changing monetary policy stimulus. Global bond yields were volatile over the month as investors responded to positive but slowing economic growth data, paired with interpreting the Fed’s next move and when monetary policy tapering will begin. Commodity prices continued to ease with iron ore and oil sharply lower, this was driven partly by signs of an economic slowdown in China.

Despite New Zealand moving into a level 4 lockdown to contain the spread of the delta Covid-19 variant, the New Zealand equity market delivered one of its strongest monthly returns in some time.  This result was mainly driven by a much stronger earnings season than consensus market expectations, with the number of profit result beats against expectation higher than misses in the order of 2 to 1 at an earnings per share level. Idiosyncratic factors such as the inclusion of Mainfreight and Serko in the FTSE global stock market benchmarks, and an acceleration in mergers and acquisitions (M&A), also boosted returns. The New Zealand market’s relatively high weighting to growth and defensive stocks may also have attracted capital as global growth expectations were trimmed.

Globally the economic expansion continues, albeit at a slower pace, and this will eventually pave the way to policy normalisation and higher interest rates. The US, for example, has replaced more than three quarters of the jobs lost following Covid-19 but the pace of recent job growth has moderated. Most large, developed countries now have high vaccination rates and the Covid-19 delta variant has not resulted in materially higher hospitalisations or deaths. Economic growth in these countries is well above potential and continues to be supported by the re-opening of service sectors and households deploying the large amount of savings accumulated since Covid-19 hit. The combination of the delta variant and higher inflation, however, appears to have dampened consumer confidence. Global inflation remains high and ongoing supply disruptions suggest it may prove more persistent than previously assumed.