Market update - quarter ended 30 September 2021

While the world grapples with the COVID-19 delta variant, there have been signs of life returning to some form of normal, with many developed countries starting to relax travel restrictions and social distancing measures. At quarter-end, over 6 billion doses have been administered, up from 3.1 billion just three months ago. However, higher vaccination rates remain skewed toward more developed nations. 

The broader New Zealand equity market returned an impressive 4.9% over the September quarter, with August the standout month featuring a 5.0% gain. This comfortably outperformed international shares, recouping some of the prior two quarters’ under-performance. Within global equities, US equities returned 0.6%, while Australian equites returned 1.7%; European equities fell 0.2% while Emerging markets was the weakest performer, falling 8.1% as a regulatory crackdown in China impacted multiple sectors including technology, real estate, and education.

China, the second largest economy in the world, has been facing several challenges with growth as it is tackles a power crisis stemming from coal shortages (coal makes up nearly 60% of China’s energy use) leading to curbs on power usage and a slowdown in its manufacturing sector, while the debt crunch at its largest real estate developer (and the world’s most indebted real estate developer), Evergrande, has now spilled over to the property sector.

The first half of 2021 saw a very strong rebound in economy activity, and this flowed through to very strong earnings growth figures for listed companies. In Q3 this momentum slowed, and supply chain issues resulted in higher costs or lost earnings for some companies. Initially higher inflation was coming from areas like used cars and lumber, but this has now rolled on to other areas such as food, natural gas, and accommodation expenses. The debate around the nature of global inflation continued, and while some central bank officials now acknowledge that inflation is likely to last longer than previously anticipated.

Central banks are beginning to talk about tapering their quantitative easing programs and monetary policy normalisation in the months ahead as the merits of continuing to run these policies is now being questioned as the side effects of this are being felt with inflation above target levels and asset price inflation in many countries further widening wealth gaps. US Fed officials have indicated they could look to announce the beginning of reducing quantitative easing by the end of 2021, and US Fed members have started to shift their views toward a rate hike possibly occurring in late 2022 from 2023 previously. However, the Fed is likely to maintain an accommodative monetary policy until the US labour market returns to its pre-COVID level of unemployment.

Investment-grade global fixed interest was essentially unchanged in value over the quarter (+0.1%), with interest rates initially falling in the quarter before rising late in the quarter. Overall, global bonds returned 0.1%, with global corporate bonds underperforming global government bonds. New Zealand fixed income returns were negatively impacted by rising interest rates in September particularly, driven by strong economic data releases. NZ bonds returned -1.2% with NZ corporate bonds marginally better than this, falling -1.0%.

At quarter-end, politics took to the centre-stage in the US on the so called “debt-ceiling” negotiations. Treasury Secretary Janet Yellen has warned that the US economy would fall into a recession if the US Congress failed to address the federal government’s borrowing limit – as otherwise the US would then default on its debt and be in the ignominious position of not being able to pay its bills.

Commodities posted strong gains in Q3 and outperformed equity markets. Crude oil prices rose as investors gained confidence given the re-openings in the US and Europe, and natural gas prices rose sharply late in the quarter as low supply faced surging demand coming into the winter months for the northern hemisphere.

In New Zealand economic data releases over the quarter showed the economy continues to recover well from the pandemic. GDP growth again surprised to the upside, with the Q2 growth of 2.8% showing a positive boost from the Trans-Tasman bubble which was open for part of the quarter. More frequent indicators suggest businesses are now more adept at responding to lockdowns, and the experience so far has been a sharp rebound once lockdowns end. The Reserve Bank of New Zealand (RBNZ) was largely expected to hike the cash rate (OCR) in August, however the timing of the lockdown announcement resulted in the RBNZ not adjusting the OCR. Since then, the RBNZ has hiked the OCR by 25bps in October.

Source: BT Funds Management 

Date: 27 October 2021