The kōura April market wrap

03 May 2022

The kōura market wrap for April 

April was a torrid month in the markets, with tech-heavy Nasdaq index and the Chinese market leading the fall. Meanwhile, the well-protected New Zealand market was one of the better performers. 

If you have been struggling to get a handle on what is happening in the markets and continue to oscillate between confidence and nervousness depending on the set of data and mood – you’re most definitely not alone. That’s what investors all over the world are experiencing right now.  

April was a brutal month for the share markets, with the tech-heavy Nasdaq index falling by 12.9% (its worst month since 2008), the broader S&P500 falling by 8.7% (in the top 10 of worst performing months for the last 20 years), and global share markets in their totality falling by 6.9%.  

Compared to this frail performance, the New Zealand market remained relatively calm and reported a more modest fall of only 1.9% in the month.  

 

 

Local market returns 

 

Kōura fund returns 

 

1 Month 

12 months 

24 months 

1 Month 

3 Month 

12 Month 

NZ Equities 

(1.9%) 

(6.7%) 

12.8% 

(1.2%) 

(4.3%) 

8.4%  

US Equities 

(8.7%) 

0.2% 

46.3% 

(5.3%) 

(4.1%) 

14.4%  

Emerging Markets 

(3.5%) 

(14.1%) 

23.1% 

(0.4%) 

(4.0%) 

11.4%  

Rest of World 

(1.3%) 

3.9% 

36.9% 

(2.0%) 

(5.4%) 

9.3%  

Fixed Income 

(2.1%) 

(9.0%) 

(10.9%) 

(1.4%) 

(7.3%) 

(3.5%) 

kōura Growth Fund  Equivalent 

 

(3.0% 

(4.9%) 

8.6%  

 

Overall, April confirmed once again how extremely difficult it is to predict market trends, given that March was a recovery month and investors started April thinking that things were on the mend and we were back to normal.  As we warned last month, with numerous cogs and wheels in motion, uncertainty hasn’t left the stage quite yet. 

In this Market Wrap, we set out some of the factors that are currently informing portfolio managers’ thinking, and how those perceptions may be changing.  

 

1. Corporate earnings have been holding up relatively well 

Fundamentally, corporate earnings (or profits, in laymen’s terms) are what we buy whenever we purchase a share. And because owning a share entitles you to a small portion of a company’s profits and dividends in the future, the higher the company’s profits, the higher the share price – as theoretically, your future dividends should also be higher. 

The positive news here is that corporate earnings have been holding up relatively well, showing no signs of high inflation impacting on consumer trends. To be more exact, by the end of April over half of the S&P500 companies reported profits, with over 80% of the companies even reporting better profits than expected. What’s more, a number of companies (including McDonald’s) actually found that inflation was turning into an advantage, allowing them to raise prices and improve profit margins across the board. 

So, where does the weak market performance come from? Tech shares are taking the blame.  

 

2. Was the digital transformation just ‘pandemic hype’? 

The bleak results delivered by Amazon and Netflix in the month seem to bring into question the long-term nature of the tech boom we saw during Covid. 

Looking at Amazon alone, on Thursday 26 April the global company reported an annual loss against expectations, with its shares subsequently falling by 14% - Amazon’s biggest daily fall since 2006. For the first time ever, its retail sales fell year-on-year and its expanding advertising business grew significantly less than previously expected. On top of this, inflationary pressures resulted in higher costs overall.  

Why this and why now? 

For some commentators, the fall in sales was due to consumers returning to their normal ways of life and preferring the in-person shopping experience of brick-and-mortar stores. And from an investor’s point of view, this may be a sign that the digital transformation caused by Covid was short-lived – a case of making a virtue of necessity.  

We also saw Netflix see falling subscriber numbers for the first time ever resulting in a mammoth 40% fall in its share price.   

Even worse, some investors worry that Amazon could be a canary for the strength of the US Consumers, indicating the consumers may have stopped spending. Whatever the reason, both scenarios would be very bad news for the US tech sector. 

 

3. Why the Chinese market is raising concerns  

Let’s head to China, which seems determined to keep its zero-Covid policies in place for now.  

This pledge has so far resulted in a Level 3-style lockdown in Shanghai and a number of other large cities, causing a fairly significant economic drag for China, which for the past few years has been a driver of global growth. And in the meantime, the trickle effect is likely to cause further disruption to already stressed supply chains – yet another factor weighing on the tech industry worldwide. 

Just to name a notable example, Apple flagged in its results in late April that the Chinese lockdowns were likely to cause significant disruptions for the company and its ability to produce iPhones.  

 

4. Why the New Zealand market is so well-protected 

As we said, the New Zealand market was one of the better performers in the month, falling less than 2% versus the 6-8% from other global markets. The reason for this is that the New Zealand market does not have any of the high-growth tech shares that are faring worst in the current market environment. 

As it turns out, the boring staid nature of our market – much-maligned only last year – in the current time of uncertainty is likely to be a positive for us.  

 

5. Are there any sectors or markets that are doing well at the moment? 

 

Buoyed by the very high oil and commodity prices driven by Russia’s invasion of Ukraine, energy, and utilities are the only sectors that have been immune from the recent ‘carnage’ in the markets.  

On a similar note, the UK FTSE 1was one of the only markets to deliver a positive return in the month and year-to-date, thanks to its high number of listed mining and resource shares.  

 

6. What is happening with the Federal Reserve and interest rates 

Now, let’s delve into another key factor, inflation, and what the US Federal Reserve might do to rein it in. Expectations for policy rates continue to rise in the US, with economists now predicting that the federal funds rate will be almost 2% by the end of the year – a meteoric rise from its current rate of 0.5%.  

To achieve this, the US Federal Reserve will need to push through at least one, and potentially two 0.5% rate rises, which is something that was unthinkable only a few months ago. 

The concern from the market is that the US Federal Reserve has waited too long and that it might now be impossible to constrain inflation without causing a recession. Which brings us to the next point… 

 

7. Are we headed for recession? 

The short answer is that it’s increasingly looking likely, though by no means certain and market commentators remain mixed on this - consumers are being hit by significantly higher living costs, including higher mortgage rates and petrol prices.  

If we are hit by recession, the key question is whether it will be a short and sharp transition, or rather something lengthier and more substantial. All we know is that, at this stage, the interest rate markets are not pricing in a recession, and equity valuations do not appear to be either. 

 

8. Where to from here? 

It’s an impossible question to answer. At the start of April, we commented that the fundamentals looked relatively solid, but we were in line for volatility. And that story hasn’t changed. 

As a global economy, the risks that have driven the previous crashes of 2008 (a highly leveraged financial system) and 2001 (a plethora of companies that had no profits and no prospects) do not exist. What we have is a high inflationary pressure that will not be easy to tame. But we also have record-low unemployment levels across the world and balance sheets (at both the corporate and consumer levels) have never been so strong.  

In the coming days, we may see either a material recovery or further uncertainty: it’s hard – not to say impossible – to tell which direction the markets will take. And that’s why it’s so important to remain skeptical of anyone claiming to have a crystal ball on their desk.  

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