WHAT CAUSED THE NZ SHAREMARKET FEBRUARY FLOP?
Mark Lister, 1 March 2021
February wasn’t a great month for the local sharemarket, with the NZX 50 index falling a hefty 6.9 per cent.
If we exclude the 13.0 per cent fall from March last year, which occurred as the COVID-19 pandemic first took hold and the country went into full lockdown, that’s the biggest monthly drop since 2009.
That move was in stark contrast to most other global sharemarkets, which experienced some volatility late in the month but still posted overall gains.
There are a few reasons for our outsized decline. For a start, our market is dominated by high dividend paying stocks, such as property, utilities and infrastructure businesses.
This makes it more susceptible than most to rising interest rates, because investors reduce their exposure to high-income sectors as the prospective return from other asset classes (such as bonds and fixed income) increases.
New Zealand’s five-year swap rate (which is essentially the benchmark market interest rate looking out to a five year term) rose as high as 1.35 per cent last week. That’s the highest since January 2020, and it’s well above the 0.54 per cent that prevailed at the beginning of this year.
While longer-term interest rates remain very low in a historical context, the speed of that rise will have unnerved some investors and impacted sentiment. Listed property was one sector that appeared to suffer from this, slipping 4.3 per cent during February.
However, it was the electricity companies that were hit hardest in February, and this was a big factor in the NZX 50’s decline.
Meridian Energy and Contact Energy were the two worst performers, falling 20.3 and 16.3 per cent, while Mercury NZ and Genesis Energy didn’t fare much better with decline of 10-15 per cent.
These falls sound ominous, especially for what should be a relatively predictable sector, but they can be explained in part by what happened during the preceding few months.
The four companies noted above all rallied more than 35 per cent (on average) between the end of September and the beginning of February. This was partly on the back of insatiable demand from international renewable energy funds, which ramped up after Joe Biden won the US Presidency.
This saw share prices ramped up to undeservingly high levels, and as the trend reversed in February, Meridian and Contact have come back down to earth.
Other notable declines came from a2 Milk, which fell 16.0 per cent during February on the back of forecasts for lower margins, higher capital expenditure, and ongoing challenges around the unofficial ‘grey channel’ it uses to sell product into China.
Fellow dairy company Synlait, which does some of the manufacturing for a2 Milk, followed it down. A reduced path of growth for a2 implies Synlait will be similarly affected.
The last notable decline was another heavyweight, Fisher & Paykel Healthcare, which came under pressure for two reasons.
Firstly, there were signs of the COVID-19 situation being brought under control, particularly in North America. A strong NZ dollar (against the US dollar) has also weighed on the company’s share price.
It wasn’t all bad during February, with 16 of the top 50 stocks posting gains. Skellerup and Summerset both posted strong earnings reports, while Vista Group and Fletcher Building found some favour with investors amidst signs of a recovery on the horizon within their businesses.
Fonterra has been another quiet achiever, with the share price up around 15 per cent in 2021 and the co-operative even upgrading its profit outlook recently.
Market corrections are normal, and are a healthy part of the investing journey, even during strong markets.
The NZX 50 rose 55.3 per cent in the three years to the end of January, trouncing Auckland house prices which increased 20.3 per cent over the same period.
A ten per cent breather after such a strong run probably isn’t a bad thing, especially for long-term investors who rely on periods of weakness for buying opportunities.