The market’s focus shifted back to company fundamentals and away from geopolitical risks in July. The US-China trade talks were scheduled for early August and as a result, no news of any significance was released in July.
A significant proportion of US-listed companies had released their second-quarter financial results by the end of July (77%). FactSet analysis indicated that on balance the results have been positive with 76% of companies reporting earnings that exceeded consensus. Companies tend to low ball analysts and so it not uncommon for them to beat analyst forecasts, but 76% is marginally better than the 5 year average of 72%.
The Federal Open Market Committee met at the end of the month and delivered the first cut to the federal funds target range in 11 years; reducing the range by 0.25% to 2-2.25%. During the month the market started to price in the probability of a 0.5% cut, and so the 0.25% cut did not catalyse a rally in stocks. Instead, stocks sold off when the announcement was released and continued to drift lower during Governor Powell’s press conference.
The US share market marginally outperformed the global average with the S&P500 appreciating 1.4% in July compared to the MSCI World’s 1.2% gain.
European share markets lagged global share markets, increasing just 0.4% in July. German stocks declined over the month (the DAX was off 1.7%) dragged down by weak economic data. This was more than offset by a strong performance by the FTSE (up 2.2%). Ironically fears over Brexit put pressure on the pound which was good news for the multinational companies that dominate the FTSE index.
The Brexit debacle continued in July but given the time to the next deadline (October 31) was pushed to the side-lines. In July, Boris Johnson was elected British PM and wasted no time in confirming to his European counterparts that he would play hardball, insisting in his inaugural speech that the UK will leave the EU at the end of October “no if’s, no but’s”. There are question marks around Boris’s ability to deliver on this statement. He does not have sufficient support in parliament to force a no-deal Brexit. He will need to either outflank parliament or call an early election to build his majority. Consequently, the likelihood of another extension is rising.
Our local share market continued to lead the way in July, managing to outperform all global markets by a healthy margin. A2 Milk can take the credit for the NZ stock exchange’s strong performance; the NZX50 index was up 3.4% over the month, but when A2 performance is excluded the market was only up 1.2%, which is in line with global markets. A mixture of strong Lyttleton port export data (a leading indicator of volume of A2 infant formula sales into China) and a number of sell-side analysts upgrades was enough to push A2 Milk’s share price up 23%. Putting A2 aside NZX listed growth stocks performed well in July (the other NZX50 leading contributors were Ryman, EBOS and Fisher & Paykel Healthcare) and yielding stocks drifted lower (the NZX50 laggards in July included Auckland Airport, Chorus and Contact).
The Australian share market also enjoyed a strong month in July with the ASX 200 index increasing 2.9%. The market’s shift higher had a broader base with no one stock making up more than 15% of the index return (A2 milk made up a staggering 68% of the NZX50 return). The reduction in the overnight cash rate to an all-time low of 1% by the Reserve Bank of Australia in early July and decline in longer maturity interest rates during the month was one of the key drivers for the strong performance. Growth and yield stocks were amongst the leaders and the key laggards for the month were resource stocks and other cyclicals.
