Generate Newsletters
Welcome to the February 2021 edition of the Generate KiwiSaver Scheme Newsletter.
Welcome to the February edition of the Generate Member Newsletter. We are delighted to announce that Nick Kynoch – General Counsel at the Financial Markets Authority – will be joining Generate next month. Nick will be a key part of our executive team moving forward. The new year’s news cycle hit the ground running and has already provided us with some “never seen before” moments. It was remarkable to witness the protests on Capitol Hill as the US Senate came together to validate the US electoral votes and ceremoniously confirm Joe Biden as President-elect. After both Georgian Senate seats turned blue in the run-off, the Democrats now hold a majority in both the House and Senate. This has interesting implications for the policies that the Democrats will seek to implement, and in turn markets. We’ll delve more into this later in the newsletter. Closer to home, and after the meteoric climb in New Zealand electricity generator/retailer stocks (“gentailers”) in December, Rio Tinto agreed a deal to remain in NZ. The deal sees the Tiwai Point Smelter remaining operational until the end of 2024. While this was undeniably positive news for the sector, the share prices offered a muted reaction, and in fact were soggy over the month. Meanwhile, new unit creation in the Clean Energy ETF that had been relentlessly buying Contact and Meridian shares in December slowed down. These events have provided a timely reminder of the merits of active investing! Looking ahead, we are rolling into the Australasian reporting season. This is a time where earnings outlook commentary from management teams will be under intense scrutiny from the market. |
Performance of the Generate Funds Returns to 31 January 2021 (after fees* and before tax).
*except the $3 per member per month administration expense that is charged to KiwiSaver members. Note: Past performance is not necessarily an indicator of future performance. Generate’s fund updates can be found here | |||||||||||||||||||||||||
Given extraordinarily strong returns in December, we were pleased with the Fund’s returns in January. The Focused Growth, Growth and Conservative funds returned 0.39%, 0.11% and 0.24% respectively whilst the Focused Growth Trust returned 0.67%. Following on from the rapid rise in Contact Energy and Meridian Energy during December, it was Mercury Energy’s turn to carry the performance baton. While Mercury had been playing catch up, they also released a profit upgrade to the market alongside their quarterly operational update. Driving the profit upgrade was an increase in forecast hydro generation, alongside elevated wholesale electricity prices which have been impacted by ongoing thermal fuel constraints. Mercury ended the month up 9.11%, while Contact Energy finished -8.31% lower. Other notable mentions locally, are the Fund’s investments in Centuria Capital and Westpac Group. Westpac is one of the Fund’s more recent investments, and the share price is now gaining traction as the operating environment for banks continues to improve. A driving force behind this is better consumer credit quality amidst an improved economic outlook. Westpac returned 9.09% in January, while our other Australian banking sector exposure, NAB, returned 4.16%. While Centuria was -11.41% in January, there was no new news released by the company. It may be the case that Centuria was simply the victim of profit taking after having reached close to 12-month highs in December. We continue to like Centuria’s growth profile and associated dividend and note that at the time of writing, Centuria’s share price has recovered nicely. Turning to our international holdings, China tech was a standout sector. As we discussed last month, Alibaba has been caught up in the negative sentiment directed towards Jack Ma after his brief spat with the Chinese regulators. Having laid low for some time Mr Ma resurfaced in January, which dispelled fears that he may have been taken into custody. The share price reacted fervently, adding close to US$58 billion dollars to the company’s market value in a single trading session. More importantly than a sighting of Mr Ma, we were pleased to read reports suggesting that the regulatory situation is easing and that everything that can be done, is being done by to appease the regulators. Alibaba ended January up 9.07%. Not to be outdone, and after a timid month in December, Tencent climbed 20.83% in January on little company specific news. However, the positive sentiment towards constructive outcomes from regulatory reviews into parts of the Chinese technology sector was undoubtedly a contributing factor to Tencent’s rise. Notably, investor inflows into the sector have overwhelmingly been originating from mainland China. A final notable contributor was Siemens AG (9.07%), who released a preliminary earnings statement showing a higher than expected first quarter profit. The company has weathered the pandemic well in comparison to some of its automotive and industrial peers, in part due to an ability to keep its factories running virtually uninterrupted. | ||||
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Looking at headline global market performance; the US S&P500 fell -1.02%. This compared to the S&P/NZ50 Index and the S&P/ASX200 returning 0.27% and 0.31% respectively. Meanwhile, 10-year US Treasury yields continued their climb which began in August rising to 1.11%. The year kicked off with markets closely following the Senate run-off vote in Georgia. The reason for this being of such significance was that should the Democrats win those two seats, they would hold a slim 1-vote majority in the Senate. Indeed, the Democrats did win both seats, and they now are in a stronger position in the White House. It is worth noting that most significant new legislation requires a 60 vote majority. The first item on the new Administration’s agenda is the stimulus plan that Joe Biden wants to implement. This is significant because it is a much larger plan than was enacted late last year by the Republicans. This includes the potential to increase relief payments made to households by an additional $1,400 on top of the $600 payments already made. By front loading stimulus directly into household wallets, there is an expectation that the economy will continue to recover and grow throughout 2021. In turn, as markets become more sanguine about the economic outlook, 2020’s most unloved sectors such as financials, energy and consumer discretionary are very much back in vogue. This is in essence the “value rotation” as investors seek investment exposures more directly linked to the economy. As mentioned earlier, the long standoff between Rio Tinto and Meridian Energy over the closure of the Tiwai Point smelter has ended. Rio has accepted a deeply discounted energy offer from Meridian, in return for agreeing to keep the smelter open until the end of 2024. We have discussed at length in the past, that an early exit in August of this year would cause large disruption to the sector, and in particular to Meridian. By signing a 2024 contract, both parties now have a period to adjust to the next stage of their respective lives. In Meridian’s case, this is finding new sources of electricity demand to replace what the smelter currently consumes. It also allows Contact Energy, who have effectively contracted to fulfil a portion of the electricity, to build their highly valuable geothermal plant, Tauhara. Contact building Tauhara allows them to discontinue generation from more expensive, and less environmentally friendly, thermal powered generation. Elsewhere, the New Zealand market was relatively quiet as participants prepare for the onslaught of company earnings released over the course of February. In Central Bank Watch, both the ECB and US Federal Reserve soothed markets by making comments over the month that there was absolutely no desire to pull back from their extremely loose monetary policy stance. Meanwhile in New Zealand, ANZ revised their Official Cash Rate (OCR) forecast, removing their prediction of a negative OCR and now picking just one more OCR cut (to 0.1% in May). Underpinning their call is a stronger than expected economic recovery, and a much stronger than expected housing market. |
Top Holdings as of 31 January 2021 Please log in to your account to see your full portfolio breakdown.
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Knowledge Builder – Diversification Diversification is one of the golden rules in investing. We all know the phrase “Don’t put all your eggs in one basket.” Unfortunately, time and again people do not apply this to their investments. For example, during the GFC when New Zealand finance companies were collapsing, thousands of New Zealanders lost much or even all of their savings. Many thought their hard-earned savings were diversified by being invested in a number of different finance companies. Unfortunately, this is not diversification, as all their investments were in one highly-leveraged sector of the same economy. Diversification is a key component of Generate’s investment philosophy. As such, we invest our members’ savings across a number of geographies, sectors and asset classes. |
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