Timing the market

Tuesday 22nd August 2023

Global

Technology stocks fuelled the gains on Monday, as the Nasdaq jumped 1.6%, while the S&P500 rose 0.7% and the Dow was 0.1% softer. Meanwhile yields on 10-year US Treasuries rose to hit their highest level since November 2007. It was fairly quiet on the release front but shares in Palo Alto Networks surged in the wake of the cybersecurity firm reporting a much stronger result than expected. A big earnings focus remains this week on AI juggernaut Nvidia, while investors are also prepping for Jerome Powell’s comments from Jackson Hole later this week.

Long term bond yields continue to push higher, flattening out the yield curve, and indicating an increasing view that the US economy will avoid a recession. The yield on 30-year bonds has hit 4.467%, a new 12-year high. A soft economic landing at the same time as bond yields are elevated may give Fed officials the luxury of holding rates higher for longer as they look to stamp out inflation. Jerome Powell has had the base case for some time that the US will avoid a hard landing – investors will hear his latest thoughts on this later in the week.

The US avoiding a recession is a more palatable scenario than the alternative. Inflation has also been coming down, and the question is how elevated interest rates will need to remain to ensure this continues. Despite price action overnight, a situation where the economy lands softly but interest rates remain high could potentially be a headwind for high priced growth stocks, but a net positive for older economy style stocks where valuations are less stretched. A scenario where inflation falls even quicker than expected and monetary policy normalises would likely meanwhile be a positive outcome for equities generally.

There are still a number of uncertainties (when are there not?) for investors, not least of which being how China, one of the world’s next most influential economies, plays out. The notion that investors should sit on the sidelines and wait for various uncertainties to be resolved is however potentially not the best course of action.

Trying to “time the market” has been fraught with risk historically. The chart below shows the returns from investing US$10,000 in the S&P500 for a 10-year period from January 2003 to December 2022. A sum of US$10,000 invested over this period would have grown to US$64,844. Trying to time the market, and in the worst case missing the 60 best days, would see the returns around 93% lower. Even missing the best 10 days over the period would cut the returns in more than half. “Time in not timing” the market.

Higher interest rates do have implications on key parts of the economy, and most obviously the housing market. US 30-year mortgage rates have hit the highest level since November 2000, at 7.48%. The average a year ago was around 5.5%. In the US mortgage holders generally tie into 30-year rates, but (unlike in NZ) cannot transport this if they move home. Potentially good news for DIY companies and less so for real estate agents.

With prices having weakened this is also dampening activity and housing supply. With the US population continuing to grow, this is a potential plus for US homebuilders, and as building materials (particularly lumber) have fallen substantially over the past year. As an aside, Warren Buffett recently increased his stake in DR Horton, the country’s biggest housebuilder.

Shares of Palo Alto Networks were a standout on Monday, surging over 15%. The company on Friday reported quarterly revenues of US$1.95 billion, 26% higher than a year ago. There was relief around the numbers as the company chose to release earnings on Friday after the bell, a slot often associated with getting bad news out.

Fast food chains Domino’s and Restaurant Brands ticked higher overnight. Buyout firm Roark Capital is reportedly buying the Subway chain for US$9.6 billion, beating out rivals. Fast food demand in the US has been strong amidst cost-of-living pressures. Less so in Russia. Domino’s franchise operator in Russia has filed bankruptcy proceedings for the unit, citing an “increasingly challenging environment.”

European indices were higher amidst more good news on inflation. German producer prices have fallen by 6%, the most since 2009. This compared to estimates for a fall of 5%. Sharp falls in wholesale energy prices drove the declines, but intermediate goods, such as metals, wood and fertiliser also fell year on year. Food prices were up 9.2%.

In Asia, the Nikkei was higher, but China was lower, with the CSI300 down 1.4%. The People’s Bank of China has cut its one-year loan prime rate by 10 basis points to 3.45% when a 15bps reduction was expected. The central bank left its five-year rate at 4.2% when a cut was expected.

New Zealand

The kiwi market was lower on Monday, with the NZX50 down 1.3% at 11,458. Company reports on the day were solid in many respects, but the reactions were less so, potentially indicating the prevailing nervousness of the market amidst uncertainties around the economy, China and bond rates. But are some investors trying to “time the market?”

A2 Milk tumbled 13.5%. As noted yesterday earnings were in line with estimates, However it appears investors expected more, particularly around the outlook. A2 is gaining share in a market which is declining. China’s birth rate is at a record low, and prices are set to remain under pressure amid competition, excess manufacturing capacity and challenging macroeconomic conditions. Margins are set to be steady, but there was an expectation that these would improve. An absence of a buyback or dividend did not help the mood.

Solid results from Chorus and Mercury NZ were also greeted with share price falls, of 2.9% and 3.6% respectively. Freightways fared better, ticking up 0.1%. The comment that the company is looking for more acquisition and merger opportunities was likely a testament to how well the Allied Express deal has been integrated. See yesterday’s note for further details on the results from A2, Chorus, Mercury and Freightways.

Elsewhere, Skellerup, which had a strong result last week, fell 5.6%. Auckland Airport, Meridian, Contact and EBOS were all lower. On the upside, Fisher & Paykel Healthcare gained 0.5%.

Some results are out this morning from some smaller caps. Property for Industry reported an interim loss after tax of $30.5 million, down from a profit of $23.8 million, weighed by investment property write-downs. Developer Winton Land has though met guidance, delivering post tax earnings of $73.8 million. A record year for delivery and settlements at the developer of integrated and master planned communities, with revenues rising 32.5% to $211.4 million.

New Zealand has meanwhile recorded a monthly trade deficit of $1.1 billion for July. This was larger than expected and puts the annual deficit at $15.8 billion. Exports fell 14% and imports fell 16%. Trade-wise, China led the falls for both exports and imports. Milk powder, butter and cheese (NZs largest export group) fell by 19% ($350 million) on a year ago to $1.5 billion, and were down 14% month on month. The numbers highlight the headwinds facing a key export industry, and the reliance on China’s economy to resume a strong growth path.

Australia

The Australian market was lower on Monday, with the ASX200 dipping 0.46%. It was also a busy day for earnings, with some mixed reactions. The consumer discretionary and energy sectors were higher while mining stocks were fairly flat. Most other sectors were lower with staples and technology pacing the declines. The SPI futures have the market heading for a gain on the open.

Breville was the standout performer, with shares in the appliances group surging 9%. The company reported that revenues and net profit after tax were both 4.2% higher at A$1.48b and A$110.2 million respectively. Profit margins edged higher, with Breville having success at passing on rising costs to consumers. Retailers have been restocking and it seems Australians are still buying and upgrading coffee machines and cooking appliances despite cost-of-living pressures.

Premier Investments also surged 12% as the company announced its CEO’s departure, with the retail group evaluating demerger prospects – the company’s brands include Peter Alexander and Smiggle.

At the other end of the scale, and outstripping A2, Iress was the worst performer. Shares in the financial services software company fell over 35% after it suspended its interim dividend while the sale of its managed funds administration business is completed. Agribusiness Elders fell after it downgraded earnings guidance, amid margin pressures. Farmers are also being cautious amid a weather forecast for a driver than average September to November. Neither Iress nor Elders are held in any of the Devon funds.

In the financials, Westpac dipped 3% after reporting a third quarter net profit of A$1.8 billion. The bank’s net interest margin eased, and expenses rose. Competition in the home loan market has offset the earnings tailwinds of higher interest rates. The bank said there has only been a “modest” deterioration in bad debts.

Insurers meanwhile are benefitting from rising rates of interest as well as for premiums. IAG said full year profits had surged 140% to A$832 million, helped by higher investment income, and “benign” weather in Australia (but not in NZ). Health insurer NIB saw underlying operating profits gain 11% to A$263.2 million. The insurer’s final dividend jumped 40%.

Shares in oOh!media were bright and breezy, surging 5.8%. The outdoor advertising company reported a 7% increase in revenues to A$296.6m while earnings (EBITDA) were a touch softer at A$49.6m. Th out of home advertising market (think billboards, bus shelters etc) has continued to grow post Covid and is now nearly 15% of the total media market.

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