THE BEAR MARKET THAT NOBODY NOTICED
Mark Lister, 2 June 2022
All of the attention was on the S&P 500 during May, as the key US sharemarket index closed 18.7 per cent below its January highs at one point, before rallying back.
That saw it narrowly avoid entering a bear market, which is generally considered to be a 20 per cent fall from a recent peak..
A few days later, New Zealand shares quietly dipped into a bear market without many people noticing.
Missed the memo, and the headline? I’ll tell you why this news might’ve passed you by.
Our main index, the NZX 50, peaked a full 12 months earlier in January 2021, and it hasn’t fallen quite as much as the US market since.
However, it’s a gross index, which means it includes reinvested cash dividends as well as taking into account the change in share prices.
Most international indices, such as the S&P 500, the ASX 200 in Australia and the FTSE 100 in the UK are capital indices. They reflect the change in share prices, whilst ignoring dividends.
There’s nothing wrong with us doing it differently. Most of the return from NZ shares has historically come from dividends (more than 60 per cent, in fact) while US investors, for example, get a greater proportion of their return from rising share prices.
However, it does mean we need to be wary of comparisons with overseas indices, as they aren’t always apples with apples.
To put us on the same footing as most overseas markets, let’s consider the NZX All index, which ignores dividends and only considers share prices.
After hitting a peak in January 2021, it drifted lower last year and has followed international peers down in 2022 as well. The index officially closed in bear market territory late last month, down 20.5 from its highs.
Before we get downbeat, let’s remember the local sharemarket has been an impressive performer over longer periods.
In the decade leading up to 2021, New Zealand shares outperformed their global counterparts in seven out of ten years.
Even including this most recent period of weakness, the NZX 50 has delivered an annual return of 12.8 per cent over the past decade, well ahead of world shares at 9.8 per cent.
Those global returns include reinvested dividends too, to keep things consistent.
It’s also important to note that in smaller markets like ours there are always anomalies.
At one point during 2020, our two biggest companies at the time – Fisher & Paykel Healthcare and a2 Milk – accounted for almost 30 per cent of the market by index weighting.
Even today, the top eight stocks represent 50 per cent of the market. This means that when a couple of the heavyweights go up or down, the index follows.
The electricity companies have also had a big influence during the past 18 months. Remember the spate of frantic buying in late 2020, as Meridian and Contact Energy were added to some green energy funds overseas?
That saw their share prices hit artificially high levels early in 2021, which helped push our market to a higher peak. As this buying demand inevitably unwound, they fell back down to earth, dragging the index in the other direction.
If one excludes Fisher & Paykel Healthcare, a2 Milk and the five big electricity companies, the average decline from the market peak for the other 43 companies in the NZX 50 is a more modest 9.3 per cent.
Whether you’ve seen it in the business pages or not, using the generally held definition New Zealand shares have fallen into their first bear market since March 2020.
However, investors who have been more diversified than the headline indices are likely to have had a better experience.
Another silver lining is that prices look much more reasonable today than they did 18 months ago, especially with our market having moved earlier than many others to factor in some of today’s challenges.