Growth assets have performed well year to date, initially on the ”Trump trade” theme of a fiscally-stimulated U.S. economy, but more recently on the back of wider evidence of faster global economic growth and a happy outcome from the French presidential election. The stronger state of world business activity will provide further support for global growth assets, but there is little room for slippage. If corporate profits deliver to investors’ high expectations, all well and good, but the risk is that current expensive valuations (especially in the U.S.) are priced for perfection and could be vulnerable to setbacks. Defensive assets such as bonds and property have been lagging, and will be under further pressure if, as seems likely, bond yields rise over the next year—an exception is infrastructure, which remains in high demand. In New Zealand, the economy continues to perform strongly and looks well placed for 2018, but further out there will need to be some evidence that economic momentum can be maintained once the current construction boom winds down.
New Zealand Cash & Fixed Interest
It has been all quiet on the interest rate front, with little net change to short – or long term interest rates: The 90-day bank bill yield has remained steady around the 2% mark, reflecting the unchanged stance of monetary policy at the Reserve Bank of New Zealand (RBNZ). The RBNZ’s latest policy statement of 11 May came as a surprise as with inflation higher than expected, many market analysts had assumed that the RBNZ would start to raise the OCR earlier than its original plan of late 2019. The financial markets do not believe this is a realistic scenario with bill futures prices currently predicting there will be one 0.25% increase by the middle of next year, and another before the end of the year. There have been correspondingly low returns from short-term investments, with the S&P/NZX 90-day bank bill index returning 0.76% for the year to date. Longer-term yields have broadly followed the evolution of U.S. bonds, with the local 10-year government generally staying around 3.0, with some occasional day-today volatility. Higher yields have caused capital losses for many bonds and there are slightly better buying opportunities than they were a couple of months ago albeit interest rates in New Zealand are still very low by historical standards.
Many listed property markets have underperformed year to date, compared with their wider overall equity markets. NZ has been no exception with the S&P/NZX All Real Estate Index recording a small year-to-date 2.2% capital gain and delivering a total return of 3.2% (3.5% including imputation credits). The A-REITs also under-delivered compared with the ASX, with the S&P/ASX 200 A-REITs Index providing a total return of only 0.5% versus the overall market’s 4.5%. The outlook is unchanged: the strong business cycle has continued to support the operating performance of property, but the threat of rising bond yields remains an issue for the sector.
New Zealand shares have broadly followed the global trend–gaining in the Trump trade period going quiet in March and the first half of April and strengthening since. For the year to date, the S&P/NZX50 Index has provided a capital gain of 6.1% and a total return including dividends of 7.7% (8.2% including the value of imputation credits)..
Australian shares have followed a similar pattern, on a more modest scale, with the S&P/ASX 200 Index up 3.0% in capital value and has returned 4.5% including dividend income. By sector, the industrials (9.9% capital gain) have done very well, as have IT shares (8.0%) and consumer staples stocks (7.8%), but the resources sector has lost ground (down 3.3%) and the financial sector has made only limited gains (1.9%). The current economic cycle continues to roll on and consumer and business confidence surveys have also been holding up at higher than usual levels, though not showing quite as strong a picture as previously.
International Fixed Interest
Much of the performance of the asset class has been driven by U.S. events. U.S. bond yields rose sharply after the election of President Trump and remained high up to the Fed’s mid-March policy meeting, when the U.S. 10- year Treasury yield hit a peak of 2.62%. Since then, however, the markets have taken a different outlook, The 10-year yield reached a recent low of 2.18% on April 18 when investors were especially disillusioned with the administration’s inability to repeal “Obamacare.” Due to high bond prices, this sector is a concern and we continue to avoid this sector due to the threat of rising interest rates which will have a detrimental impact on international bonds. Overall, overseas bonds look expensive assets and we continue to avoid this sector.
International EquitiesAfter a quiet period in March / first half of April when world shares traded sideways, shares have risen in late April and May, helped by a rally in eurozone equities after the first round of the French presidential election on April 23, and by ongoing high investor confidence in the U.S. As a result, the DAX index in Germany, and both the S&P500 and Nasdaq indices in the U.S., had reached all-time highs. Overall, year to date, the MSCI World Index is up 7.4% in capital value in the currencies of its component markets, and up 8.6% in U.S. dollar terms (9.5% including the taxed value of dividends). Among the developed markets, the best performers have been the big eurozone economies, with the DAX up 11.5% and France’s CAC index up 11.4%. The S&P500 is up 7.3%, while there were lesser contributions from the U.K. (FTSE100 up 4.4%) and Japan (Nikkei up 4.0%). In the U.S., the latest data has been a mixed bag. Even so, the latest data looks more like a wobble than a shock, and forecasters remain confident about the outlook. The news from the rest of the world is also good, particularly in the formerly sluggish eurozone where a wide range of indicators are pointing to an acceleration in economic activity.
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