KiwiSaver Monthly Update June 2022

Welcome to the KiwiSaver Monthly Update for the month ending 31 May 2022

What's the latest? 

Guy Thornewill, JUNO’s Head of Global Research based in London, gives the latest on markets this month and activity within the JUNO funds. 

Global markets remained volatile during May, which is something investors should probably get used to. Multiple cross currents remain, from high inflation, which is pressuring consumer spending and corporate profits, to ongoing supply chain issues exacerbated by China’s covid zero policy, to the war in Ukraine which could have serious implications for global food security.  However, we can also start to see some positives. Longer-term interest rates may have peaked for now, even though central banks are still hiking short-term rates. The valuation bubble in many areas of the market has been pricked, and prices are beginning to look much more reasonable, which will create good entry points, and at the end of May markets certainly perked up.

This is an environment where stock picking becomes even more important. For example, in the consumer sector, there are several different trends happening. As we exit the pandemic consumers are clearly shifting spending from goods to services, from buying a new sofa or kitchen appliance to booking a holiday or going to a concert. Travel and ticketing companies are starting to do well, but companies that benefited from high spending during lockdowns are now struggling and many now have excess inventories. Being able to discern who the winners and losers are in the current environment isn’t easy, especially as many companies are facing higher energy and labour costs, and so doing fundamental research and speaking regularly to management teams certainly helps. JUNO’s holding in Pets at Home did well in the month, as pet care is one area where spending is proving to be resilient.

Tough situations in markets, either for economic, financial, or geopolitical reasons, are also often catalysts for change. The current energy crisis caused by Russia’s invasion of Ukraine is an example. One clear change is that the move from away fossil fuels toward renewables as a source of energy will be accelerated. This provides great opportunities for investment in companies like NextEra Energy Partners, and in the end, the world will also be a better place for it.

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The switch from goods to services

CEO + Founder Mike Taylor discusses the changing investment landscape and what could be on the horizon.

Are we done yet? Should we expect another sell-off later in the year? Has inflation peaked? The indiscriminate selling has enabled us to recycle our capital into positions we feel should continue to do well. Not despite everything, but despite what’s in front of us currently. My base case is no recession for 2022, but I’m cognisant of growing concerns, particularly if oil, which is the main inflationary culprit, continues to go up. A price of US$150+ would be deeply troubling if sustained. It is entirely possible to have an “earnings” recession, where the profit margins retreat from peaks, as corporates absorb wage rises, inflation, inventory build, and higher input costs. But with unemployment so low and pent up demand for services, at this stage, it looks like profits will bear the brunt of this. Therefore, no economic recession.

I also don’t see a systemic failure of the financial system like 2008 brewing, and crypto is still not big enough to worry about. Plus, globally, housing isn’t out of control like it was in 2007 with mass overbuilding, and NINJA (no income, no job, and no assets) loans. But let’s see what the impact of higher rates is over the next six months.

So, is it time to turn and burn? Not yet. The funds are positioned cautiously, neither aggressively buying, nor selling at this point. As at the end of May we have no market hedging on, but I am looking to add this should this rally we are currently experiencing persist.

As with every market sell-off, it’s impossible to time the exact low. The best strategy is simply to allocate money to equities on a staged basis, i.e. just keep buying. This is called dollar-cost averaging and happens for most KiwiSaver accounts, as many of you invest automatically on a regular basis. Often the biggest ‘up’ days occur within a short timeframe of the market low, for example, the Nasdaq rallied 10% in three days at the end of May. If you have a regular buying plan, you won’t miss the lows.

Going up, going down

Mike Taylor looks at one stock that has gone up, and one stock that has gone down.

Going up: Volkswagen (XTRA:VOW3) (3.85% for the past month at 31.05.22)
Beep beep. Our holding in Volkswagen sold off when Russia invaded Ukraine earlier in the year on the back of further supply chain disruptions. The whole auto industry was already struggling to keep up with orders that had already been hampered by Covid-19 lockdowns and a computer chip shortage. VW traded as low as a PE of 3x during the month of May! It’s what we call deep value, especially versus Tesla! The rally came on the back of investors moving from growth to value stocks and some auto manufacturers now saying the chip shortage has largely been resolved.

Going down: Airbnb (NasdaqGS:ABNB) (-21.11% for the past month at 31.05.22)
Soft landing. Surprisingly Airbnb was down in May, caught up in the general market weakness. Despite posting a very solid set of results and the world looking to go on holiday all at once, ABNB fell into the downdraft as it has been a favourite stock with hedge funds and retail investors who may have been forced sellers. However, we think this is an opportunity to take advantage of the baby out with the bathwater. Our thesis is that ABNB will have strong tailwinds for the foreseeable future, even if there is a recession. 

Crazy things in the investment world

We delve into crazy things that are happening in markets. This month, it’s biotech stocks.

Possibly the biggest beneficiary of free money during the Covid-19 era, biotech stocks are what we in the industry call binary outcomes. They raise money from investors to engage in research and development of new drugs. It’s a risky business model but one that can be very rewarding if you pick the winners. The ETF that tracks this index in the US is XBI. Take a look, it peaked in February 2021 and it’s been all downhill since then, losing two thirds of its value. It has fallen so far that 30% of companies are now trading for below the cash on their balance sheets! This is pessimism at an extreme. So it might be first in (to the bear) and first out for biotechs. This is one for the brave.





Information correct as at 31 May 2022. Pie Funds Management Limited is the issuer and manager of the JUNO KiwiSaver Scheme. Click here for our Product Disclosure Statement. Any advice is given by Pie Funds Management Limited, and is general only. It 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 if you act on any advice. As manager of the Scheme we receive monthly fees that are determined by your balance and whether you are 13 years or over. We will benefit financially if you invest in our products. We manage any conflicts of interest via an internal compliance framework designed to ensure we meet our duties to you. For information about the advice we can provide, our duties and complaint process and how disputes can be resolved, visit www.junofunds.co.nz. All content is correct at time of publication date, unless otherwise indicated. Past performance is not a guarantee of future returns. Returns can be negative as well as positive and returns over different periods may vary. Please let us know if you would like a hard copy of this disclosure information.