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Investment Insights

Market Update November 2019

Robert Murray

Written by Robert Murray

Friday 6 December, 2019

Global Market View

Buoyed by a flurry of positive headlines suggesting a potential end to the ongoing trade war, the major US exchanges posted strong monthly gains in November. The S&P 500 climbed 3.4% to notch its biggest one-month gain since June. The Dow and Nasdaq gained 3.7% and 4.5%, respectively, for November. They also had their best months since June. European bourses also returned positively over November albeit at a slightly lower rate than the US exchanges. This partially reflects stronger fundamental economic data in the US (manufacturing PMIs), the general fatigue around Brexit and another UK general election and the consequences this will have for British and Continental growth.

Equity markets continued to see a periodic rotation away from momentum, growth and quality names toward cyclical value names.  Nonetheless, generally the theme of strong equity returns has continued throughout the year which has resulted in calendar year-to-date returns of 20.9% in NZD for the Kiwi Wealth Growth Fund. Bonds have also had a strong performance year-to-date with the Kiwi Wealth Fixed Interest Fund returning 4.4% this calendar year to date.

Despite stock markets performing well, the potential for a slowdown in global growth remains a concern for investors and management teams alike. One tool to remedy this for companies are sizeable M&A deals. Charles Schwab Corp.’s $26 billion buyout of discount brokerage TD Ameritrade Holding Corp. led the pack with luxury goods giant LVMH, Swiss drug maker Novartis AG and Japanese conglomerate Mitsubishi Corp. also among the companies that have announced multi-billion-dollar transactions in November. While developed markets continued to outperform emerging markets, some are expecting this trend to reverse in 2020, if global growth slows. The big news in New Zealand was the potential bottoming of interest rates as the RBNZ held the OCR at 1% despite most in the market anticipating a 25 basis points cut.

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Growth Performance  |  Growth Positioning  |  Fixed Interest Performance  |  Fixed Interest Positioning

Growth

Steffan-3by Steffan Berridge, Senior Quantitative Strategist &johnson-weng-round-bg

Johnson Weng, Associate Equity Analyst Global Thematic

Performance

Global equity markets rallied for the month ended November, with the MSCI All Country World Index (MSCI ACWI) gaining over 2% in local US dollar terms

The Kiwi Wealth Growth Fund (Growth PIE) returned 2.16% after tax and fees in November, 0.25% behind the MSCI All Country benchmark. Positive contributors included the Global Thematic and Core Global funds. While the Global Quantitative and Alternatives are some of the drags. The alternatives underperformed global equities but outperformed cash.

Global Thematic's return was slightly ahead of the benchmark in November, with our athleisure stocks (Lululemon, Nike and VF Corp) and electronic payments companies (Mastercard and Global Payments Inc) helping to offset continued profit taking in restaurant stocks (McDonalds, Yum Brands and Starbucks).

The Global Quantitative fund returned 2.13% in November, 26 basis points behind the MSCI AC benchmark in a month that saw cyclical sectors, Tech, Financials, significantly outperform defensive sectors like utilities and Real Estate as treasury yields picked up another 9bps. The US/China trade dispute bubbled away, with huge protest action in Hong Kong adding another dimension; the PBOC also came to market mid-month with a surprise rate cut.

Positioning

In Global Thematic we boosted our exposure to US health insurers given our increased confidence that a substantial reform to the health care system won't happen in the foreseeable future. Our broader positioning continues to lean defensive as we see the market rotation into cyclical stocks as premature, particularly in light of uncertainties around trade agreements and the lack of real momentum in non-US economies.

In Global Quantitative, our top-down macro positioning continues to favour the US and Europe versus Asia Pacific, focusing on those companies with attractive metrics across earnings quality, capital efficiency, valuations, sentiment and sustainability. Over the month, we’ve increased our allocation to Technology (Western Union) and Healthcare (AbbVie) while trimming Consumer Staples (Walgreens Boots) and Real Estate (Kimco Realty). Technology and Consumer Staples remain our favoured sectors.

Alternatives are currently adding about 3.5% to our equity exposure, bringing total equity exposure across the portfolio to just under 96%.

Fixed Interest

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by Diana Gordon, Head of Fixed Interest

 

Performance

The Kiwi Wealth Fixed Interest Fund (Fixed Interest PIE) returned -0.17% in November somewhat underperforming its benchmark which returned -0.02%.  This was due to an underweight to New Zealand bonds with longer dated maturities whose interest rates declined despite an improving New Zealand economic environment.  While short maturity interest rates rose with the good news, longer maturity interest rates were anchored lower by Australia whose economy is clearly doing worse.  

Things continued to look a bit more positive in November globally.   This was driven by the latest stronger monthly Purchasing Manager Index (i.e. factory output amidst increasing signs of thaws in the US-China Trade negotiations).  The resultant generally stronger credit (company bond) and stock markets led to the reflexively higher bond interest rates (and thus lower bond prices) we see when investors pull out of safe haven bonds into riskier shares. 

The Reserve Bank of New Zealand (RBNZ) kept its overnight Official Cash Rate (OCR) at 1.0% on November 13th much to the frustration of almost all pundits who had expected a 25 basis point cut to 0.75%.   Some economists had even expected a low of 0.25% and maybe even “unconventional policy” (i.e. negative interest rates or bond buying aka money printing).  Their collectively gloomy view was not wholly surprising since the OCR was cut 50 basis points in August based on an expected rapidly declining economy. But no.  At a subsequent lunch, Deputy Governor Geoff Bascand basically told us to take the summer off and let’s see what the next Reserve Bank Monetary Policy Meeting in February brings.   According to their current projections, the OCR will bottom out at 0.9% which is a coy way of saying well they ‘might’ cut if things get a bit weaker but it’s not entirely on the cards. 

So, what changed the Reserve Bank’s mind?  Well first and foremost you can’t eat iron ore, but you can eat beef and drink milk.  Proteins have been trading up strongly in the wake of increasingly bad news on swine fever disease in China and weaker global milk productions.  In addition, logs have bounced from their winter doldrums and tourism has been better than expected.  The RBNZ also saw higher government spending keeping things ticking along.  That’s all flown through into stronger business confidence and retail sales.  Deputy Governor Bascand was however at pains to say that the OCR is not going higher anytime soon (read in the next few years).  That’s partly because our second most important trading partner, Australia, has been experiencing weaker economic data than expected.   So, while we might have expected higher longer-term interest rates in New Zealand, that didn’t happen (yet?).  Rather our relative strength was seen in higher shorter-term interest rates and a stronger New Zealand dollar.

Positioning

November saw us maintain our conservative stance on company bonds which are trading rich relative to fundamentals in our opinion.  We did add to Housing New Zealand (rated AA+), German government guaranteed Rentenbank (AAA) and to a 1-year ANZ term deposit (AA-).  We have generally kept clear of very long maturity bonds to protect from capital losses should interest rates increase in New Zealand.  Fundamentally, while we don’t exactly see ourselves as the lucky country, there are more levers we can pull than many other countries to protect our economy such as government spending.  That makes us very cautious about investing in too long maturity securities, so we have kept the average maturity at 4.8 years.

 

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