After the sell-off, time to watch rates
Fed will play big role in where share prices go next
After a sharp sharemarket sell-off, investors have returned to their favourite pastime — anticipating what the US Federal Reserve will do next.
By this morning Fed watchers will be given more fodder, in the form of America’s personal consumption expenditure (PCE) deflator for May, which is said to be the US central bank’s preferred measure of inflation.
The Fed last month raised its interest rate by 0.75 percentage points, prompting a sell-off on US and world markets. Expectations are that it will tighten by the same magnitude this month.
But some of the market’s “up” days, post-sell-off, suggest that investors are starting to tease out a view that inflation may have peaked and that the Fed may only raise by 50 basis points rather than 75, hence the market’s focus on the data.
Expectations are for a 0.4 per cent increase in the PCE for May, with a 4.8 per cent rise year on year.
Winners and losers
With the June quarter and halfyear now done and dusted, local share price performances show the utilities and consumer staples sectors did well.
Spark was at the top of the list for the half-year with an 8.16 per cent gain.
De-listed Z Energy — now part of Australia’s Ampol — was second with a 7.7 per cent increase, followed by Vector (7.44 per cent) and Chorus (2.8 per cent).
On the downside, Eroad lost 71.6 per cent over the half, followed by Pacific Edge (46.5 per cent), Serko (45.4 per cent) and Fisher & Paykel Healthcare (38.7 per cent).
Market holds
Harbour Asset Management portfolio manager Shane Solly said that while the market was well down, it was holding up quite well amid a “pretty dramatic” resetting of share prices globally.
New Zealand price/ earnings ratios have retreated a long way to around 23 times, while in the US the figure is closer to 16 times.
He says the local ratio reflects the high number of defensive utilities, which tend to be more highly priced.
Solly points out that the Australian sharemarket has been one of the better performers having fallen by just 7 per cent from its peak.
But equities generally have been on the back foot thanks to higher interest rates as central banks attempt to put a lid on inflation.
“The next shoe to drop is corporate earnings and we have yet to see earnings numbers roll off significantly,” he said.
Not surprisingly, investors have voted with their feet and turned to the more conservative stocks over the quarter and the half-year, while some of the higher flyers have come back.
“Some of the winners out of Covid-19 — such as Mainfreight (down 21 per cent) and Fisher & Paykel Healthcare — have seen a bit of a correction.”
The quarter has been dominated by one of the fastest-ever periods of central bank official interest rate increases, Chinese lockdowns and the Ukraine war.
This has contributed to the fastest ever compression in price/earnings valuation multiples. Higher costs, particularly for labour, are hitting earnings in the near term.
And this rapid draining of liquidity is resulting in a slowing of economic activity, particularly cyclical activity.
“So markets are wary of a drop in company earnings, particularly for companies dependent on strong economic activity,” Solly says.
“We are seeing signs of improving supply chains and cyclical slowdown in activity taking tail risk pressure off the central bank rate hike timeline.”
Second-tier data out of the US had offered “a glimmer of hope” that perhaps inflation had stopped going up, and parts of China were reopening.
“And it is possible we could see central banks slow rate hikes later this year — and if economic growth and inflation slows significantly then they could be even cutting in a year’s time.
“So we have seen bit of a snap back in investor sentiment from extremely negative levels.
“Central banks are likely to keep lifting rates until inflation has rolled over and earnings risk may be elevated as economic growth slows, so while we may see some of the volatility in markets reduce they are likely to remain volatile.”
FPH weakness
Broker Forsyth Barr has done the numbers which suggest ongoing revenue weakness for respiratory products maker F&P Healthcare.
“Trends are improving off February lows and it is early days [in the financial year] but the run rate remains below current market expectations,” Forsyth Barr says.
“Highlighting the divergent Covid -19 outcomes across geographies, three month rolling trends in North America and Europe are broadly in line with pre-covid levels as FPH absorbs the wind-down in Covid-19 demand, while trends are materially ahead in Asia Pacific and other markets as Covid-19 tailwinds continue.
“Despite recent share price weakness, multiples remain elevated against the backdrop of heightened earnings uncertainty and negative earnings momentum,” it says.
Forsyth Barr rated F&P Healthcare as “underperform”.
DGL bows out
One of the local market’s more successful IPOS in 2021 — DGL Group — has departed the NZX but will remain listed on the ASX.
Shares in the highly acquisitive DGL have performed strongly since their debut on the NZX in May 2021.
The company, which makes, transports, stores and processes chemicals and hazardous waste, listed at $1.10 — a 10 per cent premium to its $1 issue price — after raising $100 million from an IPO. The stock last traded at $3.