Fed Turns Hawkish | NZ Inflation Soars | Summerset

27 January 2022

Global markets were mixed overnight, US markets (S&P 500 index, -0.2%) ended the session down, after another volatile session. The US market started in the green and climbed higher following a more dovish and opaque tone that the market had anticipated in the early part of Jerome Powell’s speech, however later comments which were more hawkish, gave more certainty over further rate hikes saw market rally fizzle towards the end.

The Federal Reserve indicated what the market had priced in recently, that rates would rise as soon as March, and that bond buying will halt in early March and then to eventually lower its $9 trillion balance sheet (selling bonds).

The March rate hike would be the first since December 2018, with elevated inflation well above 2% and a with a strong labour market, the bank stating they have plenty of room to raise interest rates before it would harm the economy – hinting at multiple hikes over the year.

Most sectors were in the red except for financials and tech, Microsoft ending the day up +2.8% as investors digested their better-than-expected result and revenue guidance, as their post result conference call built more confidence for shareholders. 

European Markets (Stoxx 600 index, +1.7%) closed higher as it braced for the Fed’s decision. All sectors and bourses were in the green, oil and gas stocks led gains, as Ukraine and Russia tension raises concerns on oil supply propping up the price of oil.

Locally, NZ inflation rose +1.4% in the December 2021 quarter, down from the +2.2% September 2021 quarter but slightly above the +1.3% forecast. Annual inflation rose to +5.9% its fastest rise in 31 years, and up from annual increase of +4.9% in September.

Summerset (SUM:NZX)

Retirement Village operators have been sold off heavily recently, negatively impacted by looming rising interest rates, local housing market jitters, general market volatility as well as omicron entering New Zealand community causing concerns for caregivers and staff availability. The sell-off has caused the sector to trade attractively, and based on valuation support (its property backed net tangible assets, and defensive earnings) are more likely to be bottomed out and is now a better place given heightened market volatility. 

Summerset delivered a sound 2021 fourth quarter sales update earlier this month resulting in a new annual sales record of 978 unit sales, up +25% from last year which is impressive given longer lockdown for 2021 (particularly for Auckland and Waikato).

Summerset and Oceania are still our preferred exposures both being BUY rated, Summerset now trading at 1.7x net tangible asset (NTA) per share, and Oceania trading below its NTA at 0.93x. While we still view Ryman less attractively in our view still overvalued especially given their limited growth outlook compared to its peers. 



Australia & New Zealand Market Movers

The Australian market was closed for Australia Day.

The New Zealand market (NZX 50 index, +0.5%) was up yesterday ending a 5-day losing streak, as investors snap up heavily beaten down shares – with modest gains across most of the market.

Stocks heavily sold off recently reported largest gains on the session, Vista Group rising +3.5%, Pacific Edge up +2.7%, and Kathmandu rose +2.3%.

NZX operator rose +2.9% after its funds management business Smartshares was given regulatory approval to offer its product to retail investors across Asia.

3 Things Markets will be Watching this Week

  1. The US Fed Interest rate decision this week will be closely watched.
  2. US earnings season gets into full steam, with Philips, J&J, GE, Microsoft, Tesla, Intel, McDonalds, Apple, Visa, Chevron, Caterpillar and Colgate-Palmolive reporting this week.
  3. Locally, Australia and New Zealand’s CPI (inflation) data is released. 
Global markets were mixed overnight, US markets (S&P 500 index, -0.2%) ended the session down, after another volatile session.

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