Markets in recent weeks have been upset by the potential threat to world economic activity from trade frictions between the United States and other major countries and trading blocs. There have been other episodes of concern over global growth since the current post-crisis global recovery set in, and risk assets have eventually ridden through them, but the current trade stand-offs are nonetheless worrying.
On balance, the world economy looks like it may keep growing at close to previous rates, but as the IMF and many others have said, risks to the outlook have risen, and investors may want to start thinking about taking some insurance against the trade disputes playing out badly. Interest-rate-sensitive assets have also struggled as monetary policy has started to turn less supportive, particularly in the US. At home, the local business cycle appears to be slowing down, and the previously strong equity market now looks as if it is taking a more downbeat view of corporate profitability.
New Zealand Cash & Fixed Interest
Once again, short-term interest rates are unchanged. The RBZ has continued to hold the official cash rate at 1.75% and other short-term rates have been correspondingly steady. The 90-day bank bill yield staying a little under 2.0%. Local bond yields have uncoupled from their usual relationship with US bond yields. Although the local 10-year government bond yield followed its US equivalent higher earlier this year, more recently it has gone its own way, and at 2.8% it is currently trading lower than the 2.9% yield in the US market. The New Zealand dollar is weaker year to date, and is down 1.9% in overall trade-weighted value.
RBNZ says it will ensure the OCR is at an expansionary level for a considerable period. Both the futures market and a range of forecasters have interpreted the statement to mean that the OCR will be on hold at least until the second half of 2019, but whatever the exact timing, low short-term rates look very likely in place for some time.
After good performance in May and June--the S&P/NZX All Real Estate Index rose by some 5% between late April and early July--the listed property sector more recently has followed the more downbeat path of the overall share market. For the year to date the Index is marginally in the black (up 0.9%) in terms of capital gain and has delivered a total return including dividend income of 3.4%.
The A-REITs also reacted in the same way to concerns about potentially higher bond yields, with a sell-off early in the year that was reversed later as bond yields did not rise as feared. Slight falls in recent weeks have eroded some of the May/June recovery. For the year to date the S&P/ASX200 A-REITs Index is up 1.8% in capital value and has delivered a total return of 4.5%.
Overseas, initial concern and a subsequent rethink about the outlook for bond yields have also driven the performance of listed property, with the end result being little net movement in the FTSE EPRA/NAREIT Global Index, which has recorded a small 0.8% loss in terms of net return in US dollars.
For much of this year the New Zealand share market had shrugged off both global volatility and growing evidence of a likely slowdown in the rate of domestic economic growth: by 6 July the S&P/NZX50 Index had gained 6.3% in capital value since the start of the year. Over the past fortnight, however, the index has dropped and the year-to-date gain has eased back to 4.8%. Including dividend income, the total year-to-date return is 6.6%.
After showing little net movement in the first half of the year, the Australian market has perked up over the past month; the S&P/ASX 200 Index is now showing a year-to-date capital gain of 3.6% and a total return of 5.8%.
The economic data continue to show slower growth ahead.
International Fixed Interest
World bond markets have been a difficult class for investors for the year to date: the Bloomberg Barclays Global Aggregate Index is down 1.4% in US dollars. Investors in global government bonds are down by 0.9% while investors in global corporate debt are down by 2.7%, owing to both higher base US interest rates and a widening in corporate credit spreads. The outlook for this asset class remains problematic.
World shares have continued to struggle, particularly in the face of rising trade war tensions, and the MSCI World Index for the year to date is up by only 2.6% in the currencies of its constituent markets and by 1.7% in US dollars (2.9% including taxed dividends). Equity prices remain 2.6% below their 26 Jan 26 peak.
The modest overall gain for the developed markets has come very largely through good performance in the US, where the S&P 500 is up 4.8%: without the US contribution, the MSCI World Index would have dropped by 3.2% in US dollars. Other developed markets have made little progress for the year to date: in Japan the Nikkei is down by 0.3%, while in Europe the FTSE Eurofirst300 Index is down 1.2%.
Emerging markets have done badly; the MSCI Emerging Markets Index in US dollars is now down 7.6% since the start of the year.
The recent outperformance by US equities reflects a number of positive US-specific factors. The American economy continues to be supported by a strong boost from fiscal policy in the wake of large tax cuts. Conversely, the global economy has been somewhat under a cloud as fears over protectionism have risen due to concerns over political uncertainty and the potential impact of escalating trade wars.
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