Global markets rose 5.6% (in local currencies) during October, fuelled by strong corporate earnings results in the United States’ Q3 reporting season and better risk sentiment more generally. This improved risk appetite also led to the NZD rising against most foreign currencies, as is often the case, which dampened the gains in global shares when measured in NZD terms to 1.7%.
The local share market was off modestly, with the S&P/NZX 50 index declining -1.3%. This is not surprising given the strength in interest rates in October, which made term deposits more attractive (an alternative to shares) and increased the costs of borrowing for companies.
Our funds had a stronger month, supported by gains in global share markets. The fund with the largest allocation to global shares, the Focused Growth Fund, enjoyed the largest gain of 1.55%. The similarly positioned Focused Growth Trust returned 1.46%. The lower allocation to global shares in the Growth Fund meant its return was 0.78%. Whilst the more defensively positioned Conservative Fund slipped -0.26% due primarily to the rise in interest rates.
The strongest performers in our International Equities portfolio during October were copper miners First Quantum which rose 24.9% and Lundin Mining which appreciated 18.2% (all returns in in this section are in their local currency). We invested in these businesses during Q2’21 to gain exposure to the increased copper demand we expect from the world’s transition to electric vehicles and a renewables-based power grid. Both stocks reacted well to renewed optimism regarding the prospects of the new green infrastructure legislation passing through the United States’ Congress.
October also saw continued strong performance from Microsoft (+17.6%) and Merck (+17.2%) after each company reported earnings that were above the market’s expectations. Alibaba (+11.4%) also rebounded to recover some of its recent underperformance.
Our weakest performer during the month was payment processor Visa that fell -4.9%. There were two reasons for this weakness, neither of which impacts our positive long-term view on the stock. The first was renewed market concern that Visa and peer Mastercard could be disrupted by Buy-Now-Pay-Later services, an outcome we view as unlikely, because services such as AfterPay use Visa and Mastercard to process their clients’ payments. AfterPay and Visa are complementary businesses rather than competitive ones. The second reason was market disappointment in both Visa’s and Mastercard’s earnings when they outlined how border closures continue to impact cross-border travel spending on their cards. While these restrictions did curtail Visa’s business during the quarter, US and European borders are opening during Q4’21 and we expect cross-border travel spending will recover in the next 12 months, laying the foundation for Visa’s historically strong stock performance to resume.
New Zealand and Australian Equities
Aventus was the strongest performing domestic share investment in October, increasing 6.8% over the month. The company announced that it had agreed to merge with HomeCo Daily Needs, another large big-box property owner during the month. Aventus shareholders will receive a combination of HomeCo Daily Needs shares and cash or Homeco Consortium shares (the manager). The deal is modestly earnings accretive (4%) and has the support of both company’s boards and a number of large shareholders and therefore is likely to be completed early next year. At the same time, Aventus took the opportunity to announce that it was performing better than it had expected and upgraded earnings guidance by 6.5%.
Z Energy was another strong performer over the month increasing 5.3% in October. The company announced that it had entered into a binding scheme of arrangement with Ampol during the month, formalising the non-binding indication of interest that Ampol made in September. There is still plenty of water to flow under the bridge, but Ampol’s enthusiasm for the deal on its call with its shareholders suggests that they are keen to complete. In our view, the largest risk to the takeover going ahead is Commerce Commission approval. Ampol has stated its intention to sell the Gull petrol station business, but the trick is finding a buyer for this business. We have trimmed our holding, reducing the position at attractive prices.
My Food Bag was the weakest performing domestic share, declining -9.7% during the month. The company’s share price slumped during the first half of the month and the company reacted by reconfirming guidance. They explained that revenues were tracking ahead of expectations driven by stronger than expected customer numbers. This announcement boosted the companies share price briefly before it slumped back to close on its lows. In our view My Food Bag is very attractively valued by the market, trading on 13 times earnings and a 6% cash dividend yield, and so we are happy to be patient while the business demonstrates its ability to deliver on its strong position in the market.