In last month’s newsletter we mentioned the importance locally of the August earnings season whereby companies needed to deliver growing profits in order to justify what are (by some metrics) high valuations. The end result was a solid earnings season with not too many surprises. Looking forward, earnings guidance was a little disappointing but this was not enough to stop the momentum of the New Zealand share market. More on this later.
Globally we remain constructive on equities. The synchronised growth we have discussed in previous newsletters has continued. This is ably demonstrated by the fact that all 45 countries monitored by the Organisation for Economic Co-operation and Development (OECD) are on track to grow this year, and 33 of them are forecast to accelerate from a year ago, according to the OECD.
It is the first time since 2007 that all the countries are growing and it is the most countries in acceleration mode since 2010, when many nations enjoyed a short-lived rebound from the global financial crisis.
Positive economic growth and low interest rates have provided fertile grounds for share markets. Given inflation’s inability to get up off the mat and loose financial conditions we expect share markets to grind higher into 2018 assuming the various simmering geopolitical tensions around the world do not erupt into something more significant. In our view the key to further gains will be interest rates. Should central banks allow interest rates to race higher once they start reigning in liquidity then that will most likely herald the end to this already mature bull market.
Following is a recap of market movements in August
Global share markets (or equities) edged higher in August with the MSCI All Country World Index returning 0.2% over the month (in local currency). This consolidated the healthy returns seen in the previous month which was no mean feat given the geopolitical tensions, concerns around the effectiveness of the Trump administration and arrival of Tropical Storm Harvey upon U.S. shores.
In the US, equities started the month strongly. However, mid-way through the month the share market had its largest one day sell off in three months on the back of ratcheting tensions with North Korea, the violence in Charlottesville and the ensuing disbanding of Trump’s business councils due to his handling of this racially charged situation.
Towards the end of the month market concerns over North Korea seemed to ease - despite Trump’s tweeting ‘itchy finger’. A larger than expected positive revision to GDP helped the share market close marginally higher. The S&P500 finished the month with a 0.1% return.
Energy was the worst performing sector due to refining and drilling activity in Texas largely coming to a halt ahead of the arrival of Tropical Storm Harvey. Financials were also weaker, in particular insurance stocks, as concerns grew that the damage from Harvey would lead to major losses. Retailers, were also under pressure in August, as online retailing continues to cut into the market ‘pie’ of bricks and mortar businesses. In contrast, the IT sector extended gains. Apple was a standout performer on the back of healthy earnings guidance that implied management confidence in the September product launch.
European equity markets weakened in August with the Bloomberg European 500 Index down -0.8%. The acceleration of economic activity in Europe combined with the debate over when potential tightening in monetary policy will commence pushed the euro higher over the month. The euro is now some 13% higher versus the USD than where it was at the start of the year. As a large number of Europe’s listed companies are exporters, this move in the currency has hurt their earnings and kept a lid on European equities.
On the economic front, GDP figures showed Europe’s economy gathering more pace in the second quarter. Of particular interest was the broad-based nature of the upswing, with many countries in the 19-nation region making positive contributions. Germany, the euro-area’s engine room in recent years, is no longer the sole contributor to this recovery. GDP data showed Spain growing at its most robust pace in two years. Investment and exports have led France to its strongest continuous economic expansion since 2011, while the Netherlands posted the strongest GDP growth since 2007. Moreover, Italy, which has been a laggard, is now showing encouraging signs and is expected to grow by more than 1% this year. Elsewhere, euro area economic confidence rose to the highest level in a decade, which can only be postive for investment and consumption in the region.
Emerging equity markets put in yet another strong month in August with the MSCI Emerging Markets Index returning 1.9% for the month (in local currency). It is now up a remarkable 20.9% year to date. For the second month running Latin America led the gains on the back of stronger than expected economic data, higher commodity prices and positive political developments. Asian share markets also performed strongly as a whole with China posting robust corporate earnings although South Korea underperformed due to the rising tensions with its northern counterpart.
In Australia the ASX200 Accumulation Index rose 0.7% during the month. The Aussie earnings season was another good one, if not quite as robust as the previous one back in February. Of note 65% of the ASX200 companies that reported full year earnings reported a lift in profits.
Back home and the NZ50 Gross Index kept its impressive run going by posting its 8th consecutive monthly gain with a return of 1.6% in August. As mentioned in the Market Update the local earnings season was solid enough to allow the market to push higher. We do wonder how long the local share market can maintain its relentless drive higher particularly given the uncertainty surrounding the upcoming election. We would welcome a ‘pause for breath’ to allow the market to consolidate its gains.
