September was a tough month for most markets with the MSCI world index falling 8.2% in local currency terms.
This drawdown was driven by two bearish themes that compounded into a very challenging market environment. The first theme was that global bond yields surged in reaction to the Federal Reserve’s (Fed’s) renewed hawkishness on inflation, which led to equity valuations compressing to absorb a higher discount rate for future earnings. The second theme was that earnings outlooks deteriorated as poor economic data suggested that companies may struggle to meet prior expectations. Falling valuations and falling earnings is a toxic combination for the equity market. We saw the effects of that combination in September.
Our international equities’ investments fared better than the index in this environment as our defensive stance paid off. We benchmark our performance to the MSCI World Index that is 50% hedged to NZ Dollars, and this index fell 5.3% for the month. We managed to mitigate some of this downside risk with our international equities portfolio falling less than the benchmark, thereby delivering outperformance for the month.
Horizon Therapeutics was our strongest contributor, rising 4.5% in a show of resilience after last month’s sell off. Horizon has featured regularly in recent monthly updates – for both its strengths and weaknesses – and we continue to believe that the company’s key drug franchises will grow well. Our investment in Wheaton Precious Metals was our second strongest contributor during the month, rising 6.1% to buck the risk-off market conditions.
Our weakest performers suffered from macro conditions, with no material company-specific news contributing to their weakness. Weaker economic conditions pressured more economically sensitive stocks, with semiconductor manufacturer TSMC declining -17.3%, and advertising businesses Meta and Alphabet declining -16.7% and -11.6% for the month, respectively. We believe these headwinds are temporary, and that each of these businesses offer excellent long-term value for investors.
New Zealand & Australian equities
The New Zealand share market followed offshore markets, declining -4.6% in September as measured by the S&P/NZX50. Whilst a little disappointing, the local share market was the strongest that we follow when measured in local currency (i.e. before the strong tailwind of a very weak NZ dollar is included).
September is generally a slow news month for New Zealand companies. Companies with June or December year-ends release their financial results in the second half of August, thereby updating the market on how they are performing. However, this means September tends to be a quiet month.
The big news in September came from interest rate markets. The US Fed signalled that interest rates would be higher for longer than expected and the new UK Prime Minister, Liz Truss, confirmed she was comfortable with massive budget deficits to fund sizeable tax cuts and subsidize energy bills for households. Both pieces of news caused global interest rates to rise quickly. New Zealand’s own 5-year interest rates increased from 4.1% to 4.5% during the month, and the value of the NZ dollar dipped. Higher interest rates tend to lure savers away from the share market and can reduce economic growth because mortgage borrowers have less discretionary money to spend.
The domestic share component of our fund delivered a relatively good performance. We finished down for the month, but not by as much as the market. Notwithstanding this, Mercury was the only stock that managed a positive return during the month when dividends were included, providing a 1% total return for the month. In our view, this reflects share price weakness leading into September rather than any significant news about the company itself.
The two largest detractors to performance were last month’s strongest contributors, Spark and Infratil. Again, there was no significant news from these companies to explain their declining share prices. They both pay healthy dividend yields and so are likely to have fallen victim to the better interest rates now on offer.