The week that was

The Nasdaq finished the week with another 4% fall on Friday, closing down 13% for the month and more than 20% year to date. The wider US market was also down sharply and is now down 9% and 13% for the month and year to date respectively. This is primarily due to rising interest rates as comparatively expensive tech stocks have increasingly become a lightning rod for concerns around interest rates. However, it was notable that despite a fairly positive earnings season so far, the market is stillworrying about the economic sensitivity of these stocks in the post-COVID environment, one that might include a recession in the not too distant future. Netflix in particular disappointed and an unexpected decline in subscriber numbers is being seen as an early sign of belt tightening. The Netflix share price has almost halved in the last few weeks and many other large tech and growth stocks are down 30%.  All of this has meant that so far this year growth-biased fund managers are mostly down 20% or so, while tech laden COVID heroes like Baillie Gifford and the ARK Global Disruptive innovation fund are down some 33% and 45% respectively (having also fallen in value last year). While the negative US GDP number last week was also unexpected the market didn’t actually take this too badly at was seen to be a technical issue due to rising imports, and actually a sign of a stronger than expected consumer expenditure. Overall, it is a particularly noisy environment and a raft of economic data releases and central bank decisions over the coming weeks are unlikely to change this. Chinese stocks, and by extension emerging markets, have also been under pressure in the last month as the intractable nature of widespread lock downs in China, where effective vaccination rates are very low, has become increasingly obvious. However, many prominent Chinese tech stocks like Alibaba jumped 20% or so when the government announced measures to stimulate the economy.

The UK and Australian markets continued to navigate all this fairly serenely while Japan and most other Asian markets also proved less volatile. Even European shares proved surprisingly robust last week given the rising concerns around energy security in the region. This meant that value managers that have been overweight these regions relative to the US have also managed to stay in positive territory, especially those with a high weighting to unpopular energy stocks. Value managers that have seen emerging ‘value’ in Asia have been less fortunate, notably Antipodes and Platinum in the local market, although April marked an apparent turn in their fortunes, and both ended the month ahead of the pack with returns in positive territory.

Encouragingly, modest falls from the local large banks and iron ore producers were again offset by broader gains across most other sectors last week, notably healthcare (mainly CSL), consumer discretionary stocks and some stocks that are classified as industrials like Transurban and Qantas. This was in the context of a surprisingly high local inflation print last week and a consensus that the RBA would be forced to act sooner rather than later, so clearly local shares are not being seen by the market as vulnerable to interest rates in the way that US stocks are.

Of course, all this talk of inflation and rising rates continued to put pressure on bonds and in recent weeks rising credit spreads have added to the falls experienced by bond investors, a trend which accelerated slightly last week. Government bonds here and abroad are still down the most this year (by about 6-7%) but local floating rate credit investments have also been on the ebb and are now down 2-3% for the year after a 1-2% fall in April.

Australian investors did get a boost from rising currency volatility in April as a weaker Australian Dollar cushioned much of the falls experienced by US equity holdings (a falling Australian Dollar means that holdings denominated in US Dollars, like US equities, are worth more).  Meanwhile at the other end of the spectrum the Japanese Yen has depreciated in a manner not seen for decades. The Yen usually appreciates in times of stress but the Bank of Japan’s insistence on maintaining ultra-low rates as other central banks move to head off inflation has undermined the value of the currency. This is just one prominent example of currency volatility that has been on the rise recently around the world and is generally not seen as something that augers well and so perhaps worth keeping an eye on.