Market Commentary

April saw a continuation of themes from the March quarter. Inflation repeatedly surprised to the upside and saw central banks rapidly move towards raising short term interest rates. The Ukrainian crisis has yet to be resolved, creating further risks to economic growth and supply chains globally. Whilst many markets began removing restrictions related to the Covid-19 pandemic, China has begun to impose tighter restrictions as Omicron takes hold there, creating further disruption. These continued headwinds to economic growth saw investment markets generally deliver negative returns over April.

In April the Reserve Bank of New Zealand (RBNZ) raised rates 50 basis points to 1.5%. The Monetary Policy Committee argued that a 50bp hike was consistent with its ‘least regrets’ approach to setting policy. The Committee is clearly worried about inflation expectations becoming unanchored and argued that faster tightening now is to reduce that risk. This hawkish commentary saw bond yields move sharply higher, negatively impacting interest rate stocks (including property) that are perceived as less attractive.

Portfolio Performance

The Listed Property Fund delivered a gross return of -2.62% for the month of April, outperforming the fund’s market index return of -3.50% by +0.88%.

For the 12 months to the end of April the Listed Property Fund delivered a gross return of -0.51%, outperforming the fund’s market index return of -3.38% by +2.88%.

Key contributors to outperformance over the month were overweight positions in Australian names Lendlease Group, Centuria Industrial REIT, Charter Hall Long WALE REIT, plus our long suffering overweight position in Asset Plus after the latter re-rated on news of the sale of one of its key Auckland properties. The only material detractor from performance was not owning Winton Land Limited as that company’s share price outperformed the index.

Outlook

As the Ukrainian crisis has persisted, we are tempering our generally positive view of the global economy, and therefore the outlook for company profits. It appears likely that this new disruption to commodity supply – particularly energy and wheat - along with further pandemic related lockdowns in China, will cause inflation to stay higher for longer than we previously expected.

April again saw markets move interest rates higher. Around nine months ago we felt most central banks and the markets themselves had underestimated the impact inflation would have on interest rates, fixed interest market returns, and yield sensitive names. Now we think a much more realistic view of the future outlook has been priced into fixed interest markets and their valuations are more attractive. Equity markets have fallen in tandem with higher interest rates, however (strangely) the New Zealand property index has not materially underperformed the broader market returns.

In recent years we have maintained a material portion of this funds’ investments in Australia with the sector by and large screening cheaper and facing a likely slower interest rate trajectory than in New Zealand. This thesis has added material outperformance but is now looking less compelling and we are beginning to move some of our Australian exposure to New Zealand. 

Locally we continue to favour New Zealand Rural Landco and continue to close our underweight in Vital Healthcare Property Trust with both well positioned to the see the benefit of the of their CPI-linked leases.

We actively manage the fund’s foreign currency exposures. As at 30 April 2022, these exposures represented 12.04% of the value of the fund. After allowing for foreign currency hedges in place, 7.93% of the value of the fund was unhedged and exposed to foreign currency risk.