World financial markets have become less concerned about North Korean risk. Equities have largely recovered from previous setbacks, and “safe haven” buying of government bonds has eased back. Whether the more relaxed mood is warranted remains to be seen. On the economic front, the world business cycle continues to improve, providing a generally good backdrop for corporate profits, though partly countered by some major central banks readying to remove some of their previous monetary policy support. Valuations generally remain on the expensive side by historical standards. The New Zealand economy is still in strong shape, though there has been an unexpected rise in political uncertainty as the 23 September election result is now hard to call.
New Zealand Cash & Fixed Interest
Yet again, short-term interest rates have remained unchanged, with the 90-day bill yield continuing to trade at just under 2%. The stability reflects the unchanged stance of monetary policy, with the Reserve Bank of New Zealand ( RBNZ) keeping the official cash rate at 1.75% at its most recent OCR review on 10 August and still maintaining that it will keep the OCR on hold all the way out to late 2019. Longer-term interest rates have followed the evolution of U.S. bond yields, with the U.S. yields falling in later August and early September on safe haven buying by investors concerned about North Korea, but have risen again more recently as investors became less uncomfortable. Locally, the 10-year government bond yield, which was trading around 2.9% in early August, fell to 2.75% on 8 September, but more recently has returned to 2.9%.
The current NZIER consensus view is that the 10-year government bond yield will average 3.1% in the year to next March, and 3.4% in the year to March 2019. The New Zealand dollar has weakened year to date in overall trade-weighted value.
Local listed property had broadly been following the global property share cycle—selling off on fears of higher bond yields early in the year, but later improving as the scale of yield rises looked less threatening—though local shares also had the benefit of strong operating conditions in the robust local economy. More recently, however, the weakness of the broader New Zealand sharemarket has taken the New Zealand REITs down with it—the S&P/NZX All Real Estate Index peaked on the same day as the wider market (23 August) and has dropped by the same amount since (2.1%). The A-REITs have had large swings in price during the year, principally because of changing expectations about likely rises in bond yields with original fears of large and early rises in bond yields subsequently revised to a less alarming outlook. An additional factor at play has been the general investor concern about the impact of e-commerce on the retail REITs, which have a large weight in the sector. The result is that the S&P/ASX 200 A-REITs Index has recorded a 4.3% year-to-date capital loss, and a 1.1% loss after including dividend income.
New Zealand shares, which had been rising strongly since late March, plateaued in mid-August and have slid since late August. At its current level, the S&P/NZX50 Capital Index has dropped by 2.1% from its peak (3687.2 on 23 August). The strong performance earlier in the year, however, means that year to date, the index has recorded a 9.8% capital gain and a 12.8% gain including dividend income (13.8% including the value of imputation credits).
Australian shares have continued to drift sideways, and are still close to where they started the year. Year to date, the S&P/ASX 200 Index is up a marginal 0.5% in capital value, though the return is a more respectable 4.1% after including dividend income.
International Fixed Interest
The biggest influence on global bonds in recent weeks has been the tension over North Korea, which has led during more nervous periods to safe haven buying of government bonds. Conditions in global bond markets remain highly unusual, with investors finding very little yield on offer.
World equity markets took a hit in August as geopolitical tensions heightened about North Korea’s nuclear weapons programme, but recovered in September despite the ongoing issues. Year to date, the MSCI World Index of developed markets equities is up by 9.5% in the markets’ own currencies, and by 13.5% in U.S. dollar terms, as the U.S. dollar has been globally weak. The U.S. market has led the developed markets, with the S&P500 Index up 11.7% in year-to-date capital value. European shares have generally done well, particularly since the end of August, on accumulating evidence of stronger eurozone economic growth. The FTSE Eurofirst300 Index is up 4.7%, with German shares up 9.0%, and French shares up 7.2%. The U.K. market, mired in its Brexit process, has lagged, with the FTSE100 Index up a marginal 1.0%. Emerging markets have been stronger again, with the MSCI Emerging Markets Index up 22.4% in the emerging markets’ currencies and by 27.8% in U.S. dollars. The key BRIC markets have done very well. Brazil’s sharemarket has been exceptionally strong, up 25.8% year to date, and Indian shares are not far behind, with a 21.2% rise. China’s Shanghai Composite Index has performed well since midyear, and is now up 8.1% year to date. Russian shares are now roughly all square for the year: prices dropped sharply in the first half of the year but have recovered since mid-June. Year to date, the FTSE Russia Index, which is denominated in U.S. dollars, is now up 0.8%, though the alternative RTS Russia Index (also U.S. dollar-denominated) shows a small 2.5% loss. On the economic front, the outlook remains positive.
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