Harbour Asset Management: Another turning point for markets

Global equity markets witnessed an increase in volatility in May, principally due to bond markets reacting to new talk of the potential for the US Federal Reserve to begin “tapering” their bond purchase programme. The sell-off in bonds was matched by a significant reversal in defensive versus cyclical stocks. Many global equity markets actually still managed a respectable local currency return in May, although the strength of the US dollar meant that the global equity benchmark was flat for the month.

The listing of Mighty River Power and a raft of further corporate activity marked the New Zealand equity calendar. The New Zealand market under-performed global markets, in part reflecting the defensive characteristics of the market. The “digestion” of equity supply might also partly explain the under-performance of the New Zealand market in the month. The New Zealand market fell 2.2% in May.

A key feature of the month was a significant rise in the dispersion of returns. On the one hand “growth” stocks like Kathmandu, Fisher & Paykel Healthcare, Diligent, and Ryman Healthcare had returns more than 10% above the market, whereas Telecom, Chorus and the Australian banks under-performed by more than 10%. Some stocks also had downgrades to earnings and were significantly marked down – for instance GPG, Nuplex, and Skellerup all fell sharply. Industry days for Telecom and Fletcher Building also saw some analyst earnings downgrades.

The Australian market pulled back sharply in May, down 4.5% in Australian dollars, and fell 12.1% in US dollars, as the Australian dollar fell sharply. Weaker data, a cut in interest rates and a correction in bank shares all contributed to the Australian market weakness. Again the Australian market saw a major dispersion in sector returns. Financials fell 8.4%, while resource and energy companies were up 2.5%.