The Focused Growth Fund declined -4.97%, the Focused Growth Managed Fund -4.92%, the Growth Fund -4.17%, and the Moderate Fund fell -2.21% in June.
World equity markets fell 8.6% (in local FX) in June, which translated to a 4.7% fall in NZ Dollars.
This decline was catalysed by economic data released early in the month that confirmed inflation remains persistently high, which in turn led to incrementally hawkish commentary from the Federal Reserve, higher long-term interest rates, and lower equity market prices. While we anticipate this financial market volatility may continue in the months ahead, we believe that the companies we own will continue to prosper and create lasting value for their shareholders, including Generate members, over the medium and longer terms.
There was little company-specific news flow during June, with most companies waiting until the Q2 earnings season that starts in mid-July. The companies that contributed most to return during this quiet period were drug companies Merck and AstraZeneca, which were up 4.5% and 4.0% respectively in June. Berkshire Hathaway was the biggest negative contributor to our portfolio after falling 9.6% during the month, although this brief period of under-performance should be appraised within the context of Berkshire’s continued out-performance since the start of 2022.
Overall, we remain defensively-positioned heading into the Q2 earnings season, and confident in the medium and long-term potential of the companies in our international equities’ portfolio.
New Zealand & Australian equities
The local sharemarket followed the lead set offshore, but as often is the case, local shares proved to be more defensive than overseas shares. For example, the S&P/NZX 50 Index, which is a typical benchmark for local shares, declined 3.9%, which is less than half the decline for global shares, excluding the impact of a weak Kiwi (NZ dollar).
Only four holdings managed to generate positive returns in June: Mercury, Investore, Chorus and Vector. These are all businesses with limited economic sensitivity and an ability to generate more income in periods of increased inflation. Increasing talk among market participants of the possibility of recession created stiff headwinds for any company adjudged to have exposure to the local economy.
For now, we are continuing to maintain conservative positioning. While at this stage, a recession is by no means a foregone conclusion, the pace of interest rate rises will undoubtedly put pressure on a cohort of consumers as increasing mortgage servicing costs reduces their capacity to spend.
National Australia Bank was a key detractor from returns in June. Australian shares were down a considerable 8.8% (measured using the ASX200 Index) during the month, and National Australia Bank was even weaker, down 12.4%. The Reserve Bank of Australia played catch up with other central banks raising rates by 50 bps in June, and signalling an increased willingness to continue to raise rates and fight inflation. While higher interest rates are good for bank margins (the difference between the rate they pay depositors and charge mortgage borrowers expands), the pace at which they are increasing raises concerns that this could slow credit growth, and put some borrowers under pressure.