Global equities struggled in January and this was reflected in the performance of the funds. The Focused Growth Fund declined -6.26%, the Focused Growth Trust -6.32%, the Growth Fund -5.66%, and the Conservative Fund -2.24% in January, lowering the 1 year returns to 3.81%, 3.81%, 2.63%, and 0.54% respectively.
January was a volatile month in global equity markets. US markets were dominated by increased talk of tighter monetary policy from the US Federal Reserve. This led to the market’s expectation for 2-year average interest rates in the US to rise from 0.75% at the start of the month to 1.18% at the end, and for US stocks, especially high growth tech stocks to sell off materially. By January 27th, the S&P 500 had fallen -9%, the tech-focused Nasdaq 100 -14%, the Russell 2000 index of smaller companies -14% and the Russell 2000 growth index of smaller, growth-focused companies -19%, before all indices recovered some of their losses in the final few days of the month as companies started to report strong earnings for Q4’21.
In China, by contrast, monetary policy was eased marginally, and both offshore and onshore Chinese markets showed relative strength. These dynamics led to our Chinese investments posting strong gains for the month, with Ping An Insurance +8.5%, Tencent + 6.5% and Alibaba +5.9%. Within US markets, Mastercard recorded a +7.7% gain after reporting strong results that reduced the market’s concerns about the competitive threat of Buy Now, Pay Later services. More defensive stocks also performed well, with pharmaceutical company Merck +6.3% and Berkshire Hathaway +4.7% for the month.
Netflix was our poorest performing stock in January, falling -29% in the month, after suffering from the initial sell off in higher-valuation tech stocks and then forecasting slower subscriber growth for Q1’22 than the market had anticipated. We believe this sell off was far from warranted, and we’ve taken the opportunity to add to our position.
New Zealand & Australian equities
Like global markets, the New Zealand share market endured a turbulent start to the year declining -8.8% as measured by the S&P/NZX50G. To put this in context, it was the worst performance in a January dating back to 2008, with just one constituent producing a positive return.
In that light, our strongest performing investment was Z Energy (ZEL) which was flat over the month. Notwithstanding the Government’s ongoing Covid-19 related restrictions, ZEL released strong 3Q operating results and reaffirmed FY22 earnings guidance. The company reported positive progress towards organic growth opportunities highlighted at last year’s Investor Day including convenience retailing and network optimisation. While that was positive, the more likely reason that ZEL did not decline alongside the broader marker is that it is currently under takeover by Ampol, the Australian petrol retailing and refining giant. The transaction is subject to Commerce Commission approval with a decision expected to be announced mid-March, up until which point ZEL’s share price is supported by Ampol’s offer price of $3.83 per share.
After a very strong month in December, Centuria Capital was the weakest performer in January, declining -15.1%. Our regular readers may recall that Centuria is a fund manager REIT, meaning that they own and manage a portfolio of real estate assets, which is currently valued at A$18bn. As the total value of the assets Centuria manages grows, so too do their earnings. While REITs as a sector sold off very hard in January, fund manager REITs were the hardest hit. This is because concerns of rising debt costs as a result of increasing interest rates have the potential to reduce the rate at which fund manager REITs can acquire new assets, and in turn grow earnings. Centuria’s closest peers, Charter Hall Group and Goodman Group were also down -18.6% and -12.5% respectively. Late in the month Centuria actually upgraded their outlook for FY22 earnings by 10% relative to prior guidance. Should this earnings forecast be met by the company it will represent a greater than 20% growth rate on the prior year’s earnings. This is attractive growth for the REIT sector.