4/30/2022 12:00:00 AM

A Message from Mike: A cruel month

Technology stocks and bonds, fall steeply

April is the cruellest month, breeding lilacs out of the dead land, mixing memory and desire, stirring dull roots with spring rain…

“The Waste Land”, a poem by T.S. Eliot  

The US market had its worst month since October 2008 with the tech heavy Nasdaq down 13%, and it’s the worst start to a year since 1942. So yes, let’s not beat around the bush, this sell-off is not garden variety. The usual safe harbours were in fact the driver of this cruel month. Tech giants Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Tesla (TSLA), once a place to hide and gloat, fell precipitously during April. The old adage, any port in a storm, failed miserably for bonds too, with the Bloomberg bond index having its worst month since inception in 1990, down 5.5%. Commodities, too, retreated from recent highs. 

So what gives? We can’t just hide under a rock, and we can’t just sit in cash when inflation is 8%. Interestingly, on the cash point, Warren Buffett has just been on a spending spree, deploying the most money since 2008. He intimated at his recent AGM (held for the first time in person since 2019, in Omaha, Nebraska) that he’d rather invest in good-quality businesses than hold cash during inflationary times.

Watch the macro

I’ve managed money through volatile times in the past, and now more than ever you’ve got to watch the macro and follow the signposts. You need caution, to strategise several moves ahead and be looking up all the time, not down in the weeds. In bear markets, I hate to use that term because it attracts so many negative connotations, macro is far more important than micro. I learned that the hard way in 2008.

What has changed?

Speaking of signposts, you could say that the market sold off in April due to the same worries as previously, but that would be naive, the story has evolved. What’s changed? 

  1. There is no safe habour anymore. Previously resilient tech heavyweights AMZN, AAPL and TSLA led the market lower in April. 
  2. Bonds had their worst month, everyone hates them. (That makes them interesting to me).
  3. Shanghai is in lockdown but Beijing has revealed they will stimulate again. 
  4. “Buy the dip” investors are getting run over, from Netflix to Gamestop to Robinhood. In the worst sell-off for tech in 14 years, many investors simply haven’t been through a bear market before.
  5. Japan – the yen and the Bank of Japan (BOJ). They’re back on the pump! The BOJ has said it will buy stocks and bonds to cap the Japanese Government Bond 10-year at a mere 0.25%.
  6. Consumer sentiment is flashing red.
  7. Corporate earnings are starting to feel the pinch of higher costs.

Staying cautious on tech

So what’s our top-down strategy? We’re staying cautious on tech, although noting opportunities are presenting, the preference is to wait until the central bank interest rate strategy changes. We remain positive on commodities, and we expect volatility to remain elevated. We think bonds are now looking more attractive. We see tough times ahead for the consumer. 

Inflation has probably peaked (absence further escalation with Russia), and green infrastructure will have a massive boom. We think 2-year interest rates have probably moved high enough already this cycle. Finally, we think central banks will blink later this year or earlier next year as either inflation falls or economies slow too rapidly. Therefore we are building portfolios that align with this. 

A mixed month

Performance wise for April, the results were dispersed at Pie. Our Australasian Dividend Growth and Conservative funds put in an impressive defensive game (down 1% or less) – not bad when you consider the environment. On the other side, the Australasian Growth and Growth 2 funds were again hit hard with the tech sell-off. Thank goodness for diversification! 

A good diversification strategy does not mean buying more of the same thing, it means spreading your investment across sector, style, size, market, asset class and geography. For example, if you own 20 residential properties in Auckland, your risk is reduced but you are not diversified. At Pie, our products offer diversification within equities, by region, style, size, market and geography, with our Conservative Fund adding other asset classes. Please talk to our team if recent falls are keeping you up at night or you want to discuss diversification. 

As many of you will be aware, My Food Bag, in particular one of its founders, Nadia Lim, have been the victim of some appalling comments from the CEO of a NZ-listed company. You will also know, that one of our Directors, Cecilia Robinson, is also a founder of My Food Bag. We stand alongside Cecilia, Nadia and the My Food Bag team, that this type of behaviour and commentary has no place in New Zealand’s corporate scene in 2022.

Stop press
Markets have continued their precipitous sell off in May. This is opening up some opportunities across the board, particularly in corporate bonds and high-growth equities. We are watching and will take advantage of these as and when they present.

Thank you again for your support. If you have any questions please don’t hesitate to email me on [email protected]    

Mike Taylor,
Founder, CEO and Acting Chief Investment officer

Information is current as at 30 April 2022. Pie Funds Management Limited is the manager of the funds in the Pie Funds Management Scheme. Any advice is given by Pie Funds Management Limited and is general only. Our advice relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees, like brokerage, if you act on any advice. As manager of the Pie Funds Management Scheme investment funds, we receive fees determined by your balance and we benefit financially if you invest in our products. We manage this conflict of interest via an internal compliance framework designed to help us meet our duties to you. For information about how we can help you, our duties and complaint process and how disputes can be resolved, or to see our product disclosure statement, please visit www.piefunds.co.nz. Please let us know if you would like a hard copy of this disclosure information. Past performance is not a guarantee of future returns. Returns can be negative as well as positive and returns over different periods may vary.