2022: Awful so far, could get worse
The market has plunged in the past six months and there’s no guarantee the pain for investors is over yet
New Zealand’s benchmark share index has suffered its worst start to the year since 2008 — and there’s likely to be more pain to come.
The NZX50 fell 16.6 per cent between the start of the year and June 30, the worst sixmonth period since the six months to June 30, 2008, when the index fell 20.9 per cent.
That was when the world was in the midst of the global financial crisis and New Zealand was in a recession.
Still, it’s not as bad as the S&P500, which has been hit by its worst first half since 1970.
Mark Lister, head of private wealth research at Craigs Investment Partners, said sharemarkets usually fell ahead of a recession.
“It sees it coming and then usually bottoms and drags itself out ahead of the recession ending, which was definitely the case in the US back then.”
Lister said the GFC bottom for sharemarkets was March 2009. At that point the US was still in recession and it stayed there until June 2009.
“The market turns when it sees those recessionary risks on the horizon and then it also turns in the other direction when it starts to see that recovery on the horizon.”
What will the second half hold?
Lister says the market is starting to see the recessionary risk as rising.
“The weakness we have seen over the first half of this year has been predominantly driven by much higher inflation than expected and much faster interest rate hikes than we expected and that has seen markets repriced to lower levels.”
Now investors are worried that interest rate hikes will tip the country, and the world, into a recession of some magnitude.
“As we sit here today it looks finely balanced, depending on who you ask. Call it 50-50 whether we find ourselves in recession and that will be a function of whether inflation comes off the boil quickly enough to give the central banks a chance to ease off or whether they have to keep pumping up interest rates.”
Lister said a lot of that was already baked into the sharemarket. “We have already suffered a pretty hefty fall. The sharemarket is completely aware of many of those risks.”
But he sees a bit more pain to come.
“I don’t think we will see a repeat of the first half. The US markets were down 20 per cent in the first half of the year — I don’t think it’s going to be down another 20 per cent in the second half of the year.
“We have got a bit more downside to come because what we haven’t seen is some of the economic impact of the interest rate rises. You are still yet to see companies start reporting weaker profits, still yet to see mortgage holders put the wallet away and stop spending, or unemployment creep up.”
Bear markets typically saw a fall of 30 to 35 per cent. If today’s falls followed the typical pattern, that meant there could be another 10 to 15 per cent to come in the US markets. “But the bulk of it is behind us.”
Inflation peaking?
There are signs that inflation is peaking — or has already. This week oil prices slumped 10 per cent overnight Tuesday.
Lister said oil prices were a key piece of the puzzle.
“Commodity prices starting to come off, that’s crucial, and there are other signs of some of the supply bottlenecks easing.”
New Zealand inflation data is still expected to be on the rise as our statistics only come out quarterly, not monthly as in the US and the UK.
“If we did it monthly, we might have already seen the highest point.”
He said the peak was likely to be behind us but inflation was not likely to fall back to
2 or 3 per cent by the end of the year. That means more interest rate hikes to come.
But Lister said one positive for New Zealand was that we were one of the first countries to start unwinding stimulus, with the Reserve Bank halting its quantitative easing in July last year, while it began hiking the official cash rate in October.
The Federal Reserve only stopped doing QE a couple of months ago and the US, Australia and Europe were well behind New Zealand in increasing their cash rates.
Impact on companies
Share prices have fallen but companies themselves are still to feel the pain from higher borrowing costs, either directly or from consumers curtailing their spending.
“What you have seen is the share prices adjust, which they have. But we haven’t seen the impact of the higher borrowing costs, the higher staffing costs and higher fuel costs and lower New Zealand dollar which means all those offshore costs are higher.”
The August and February reporting seasons could be where these impacts show up in companies’ bottom lines.
During any recession or slowdown, it is typically businesses that sell discretionary items that suffer the most. Those in retail, or Skycity Entertainment, or the likes of Sky TV are expected to face added pressure.
Fuel costs could also hit Mainfreight and Freightways.
The Warehouse and Briscoe Group sold discretionary and necessary items, Lister said.
“Sometimes people are trading down to more affordable items which those two businesses do sell and they are both good operators.”
While he didn’t expect those retailers to “fall off a cliff”, he said they would not be immune from the economic downturn.
“They will be suffering from trying to get staff, maybe those staff cost a little bit more. The New Zealand dollar is lower now which means a lot of stuff they buy costs them more. At the same time revenue may fall or flatline.”