The world economic expansion is still trucking along, although it has become a bit more dependent than previously on the U.S. economy, and should support some further equity gains, although against a background of rising political risks—especially the risk of trade wars. Fixed interest and other income-oriented asset classes continue to be challenged by the prospect of rising inflation and tighter monetary policy. In New Zealand, the economy is still growing but not as robustly as previously, and although local equities have been performing well, the outlook for further gains is more uphill.
New Zealand Cash & Fixed Interest
Once again, there is little to report on short-term interest rates. The RBZ maintained the official cash rate at 1.75% at it’s latest Monetary Policy Statement of 10 May. It has held steady since November 2016. The 90-day bank bill yield continues to trade a little under 2.0%. Bond yields have been more volatile, and not as closely linked as usual to U.S. bond yields. On occasions, the local 10-year government bond yield has yielded less than its U.S. equivalent. Currently, however, they are both just over 2.9%. The New Zealand dollar is weaker year to date, and is down 0.9% in overall trade-weighted value.
Short-term interest rates are very likely to remain around current levels over the next year. The RBNZ says it will be keeping policy unchanged until late 2019, while some forecasters think it might start raising rates a little earlier. Low rates on cash in the bank will be a feature of the local investing landscape for some time yet.
Local listed property has not fully recovered from the sell-off at the start of this year when the sector (like its counterparts overseas) was hit by concerns over the potential impact of rising interest rates. Year to date, the S&P/NZX All Real Estate index is down 2.3% and down 1.4% including dividend income. It has substantially underperformed the 6.9% total return from the wider sharemarket as a whole.
As in New Zealand, the A-REITs have struggled to recover the ground lost at the start of the year, but currently have just managed to creep into the black for the year, possibly helped by reinvestment of cash from holders of Westfield with AUD 7 billion of cash was paid out on 7 June as part of the Unibail takeover, and this may have supported the remaining names in the sector. The S&P/ASX 200 A-REITs index is now marginally ahead (0.1%) in capital value for the year and has delivered a total return of 1.1%, a little behind the 2.4% return from the wider sharemarket.
Overseas, listed property has also underperformed with the FTSE EPRA/NAREIT Global index showing a small 0.4% loss in terms of net return in U.S. dollars, compared with the 2.5% net return from the MSCI World index.
The New Zealand equity market has been relatively resilient by current global standards. Year to date, the S&P/NZX50 index is up 5.2% in capital value, with much of the gain down to strength in the past three weeks—the index has gained 3.4% since the end of May. Year to date the total return including dividend income is 6.9%. The Australian market is marginally in the black year to date. The S&P/ASX 200 index has made a 0.5% capital gain and delivered a total return including dividends of 2.4%.
The relatively good performance of New Zealand shares has been somewhat surprising as the underlying economic backdrop has been underwhelming. At the time of writing, the official data on March quarter GDP growth was still a few days away, but forecasters’ advance estimates were that the economy had slowed down to a 2.6%-2.7% annual growth rate, down a bit from December 2017’s 2.9% and a good deal lower than the 3.5% to 4.0% maintained from early 2015 through to late 2017.
International Fixed Interest
Global bond markets have continued to be difficult for investors. The Bloomberg Barclays Global Aggregate index year to date is down 1.7% in U.S. dollars. Both investors in global government bonds (down 1.0%) and global corporate debt (down 3.2%) have lost ground as bond yields have risen and corporate credit spreads have widened. The macroeconomic currents continue to run against bonds as an asset class.
It has been a volatile year for global equities. It started with a strong rise in January, a substantial decline in late January and early February, followed by a recovery that never took proper hold. By early April, prices were back to their early February lows. More recently, there has been a slow rise in prices, but the recent gains have barely been enough to generate a year-to-date capital gain. The MSCI World index of developed markets is up only 2.3% in the overseas markets’ currencies and by only 1.5% in U.S. dollars (2.5% including the taxed value of dividends). Prices remain below their late January peak, with the MSCI World still 3.0% adrift of its January 26 level.
Among the major markets, the U.S. has been doing best as its growth prospects have improved relative to other regions. The S&P500 is up 4.0% in capital value year to date, while the tech-heavy Nasdaq index is up a strong 12.2% on the back of good performance by an in-demand sector. Other major markets have shown little net movement, with Japan's Nikkei up 0.4%, and the FTSEurofirst 300 index of European shares down slightly (0.6%). In the U.K., shares are also down a little (0.7%).
The emerging markets have been weak in the wake of sharp setbacks in Argentina and Turkey which have sensitised investors to the risks of the emerging markets more generally. The MSCI Emerging Markets is down 3.9% in U.S. dollars, although the key BRIC markets (Brazil, Russia, India, China) did better than most (largely attributable to China). The two countries that sparked investor alarm have continued to struggle, with MSCI Argentina index down 35.4% and the MSCI Turkey index down 34.9% (both in U.S. dollars).
The world economy is still enjoying a largely synchronised business expansion. Virtually every sector is growing, according to the IHS Markit Purchasing Managers Index (PMI) measure which is based on aggregated single country PMIs. If the economics prevails, world equities should be able to make further gains. But protectionism, in particular, and the potential for other policy mistakes and geopolitical shocks, mean that gains, if they come to hand, will be achieved in choppy markets, and the volatility seen year to date is likely to remain a feature of the markets.
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