What happened this quarter (three months to 31 March 2022)
The New Zealand equity market struggled against a backdrop of falling international equity markets. While most overseas markets staged somewhat of a recovery in March, New Zealand’s market trended sideways, and this partly explains its underperformance over the quarter as a whole, which saw the NZX 50 lose 7.1%.
However, it was a different story in Australia, with equity markets one of the global standouts, driven by the energy and materials sector, which benefited from surging commodity prices. For the quarter, the ASX 200 gained 6.4%.
In fund performance, Chorus was one of the standouts. Shares in Chorus rose 6% over the quarter, helped in part by solid FY22 half-year results that included an upgrade in its dividend guidance to 35 cents per share, from 26 cents per share. The company added that the dividend upgrade would provide shareholders with “dividend predictability, stability and sustainable growth”. Furthermore, the Commerce Commission confirmed that Chorus’ promise of faster fibre broadband speeds was flowing through to its customers.
Reflecting a pick-up in volatility and weakness in both equities and bonds was the strong relative performance of the fund’s overweight to cash. In late January, the VIX Index – a measure of market volatility – rose to its highest level in 18 months, which saw investors favour safe haven assets, including cash. Furthermore, as the Reserve Bank of New Zealand began to lift interest rates, cash balances began to increase yield, albeit at a small rate.
One of the fund’s largest overweight positions, Cleanaway Waste Management, was another contributor to performance over the quarter. Cleanaway ended the quarter higher after the company reported a strong first-half 2022 result relative to expectations, which included a gross revenue increase of more than 16% from the same period last year. Despite the New South Wales lockdowns compressing margins (fixed costs remained), news that further lockdowns are highly unlikely meant the outlook for business is bright.
Detracting from performance were two of the NZX 50’s growth stocks, Pacific Edge and Serko, the two worst-performing stocks in the NZX 50 over the quarter. Pacific Edge suffered from the underperformance in the healthcare sector, while Serko shares struggled, reflecting the ongoing uncertainty for the travel industry amid the Omicron outbreak.
And finally, James Hardie Industries, one of the fund’s largest overweight positions, was another drag on performance, with shares in the company ending the quarter down more than 20%. Despite reporting relatively strong third-quarter 2022 earnings, rising long-dated US bond yields, which could put pressure on the housing market, dampened the outlook for the building and materials.