Looking ahead, the global economy looks like continuing its already long post-GFC expansion into 2019, which should be supportive for growth assets, but equities remain overdependent on the performance of American shares and the American economy, and there are risks (notably around trade wars and potential mistakes from accidentally overtightening monetary policy) which could derail the outlook. In New Zealand, the economy appears to be better poised than downbeat business surveys might suggest, but a variety of cost pressures on businesses suggests a growing economy in 2019 may not translate into strong corporate profit outcomes.
New Zealand Cash & Fixed Interest
Once again short-term interest rates are unchanged, with the 90-day bank bill yield continuing to trade just below 2.0%. Steady rates reflect the Reserve Bank of New Zealand's unchanged monetary policy. The official cash rate, or OCR, was yet again held at 1.75% at the latest review on 8 Nov.
Bond yields have risen in recent weeks and the 10-year government bond is now 2.8%. The New Zealand dollar has fallen in value this year: partly reflecting the global strength of the U.S. dollar. In overall trade-weighted value, the kiwi dollar is down 0.5%, due mainly to its depreciations against the U.S. dollar (down 5.0%) and the Japanese yen (down 4.2%).
Returns from short-term fixed interest investments will remain very low for some time yet.
Listed property has broadly tracked the path of the overall share market, dropping in late September and through October, with some modest recovery more recently. Year to date, the S&P/NZX All Real Estate index has recorded out a small capital gain of 2.0% and a total return of 5.5%, a bit behind the 6.7% total return from the wider market.
Listed property has proved to be a usefully defensive asset through the past month’s equity volatility. Although the absolute return has not been especially impressive— the S&P/ASX 200 A-REITs index is marginally down (by 0.2%) in capital value, and has provided a modest 3.0% total return—the sector has outperformed the 1.7% return from the overall sharemarket. The outcome flatters the sector to a degree, as there was a burst of merger and acquisitions activity that fortuitously boosted the prices of the target A-REITs.
International property has not worked out quite as well as a defensive option. Year to date, the FTSE EPRA/NAREIT Global index is showing a 2.9 % loss in terms of net return in U.S. dollars, a bit worse than the 1.9% loss from the MSCI World index on the same basis.
The significant sell-off of New Zealand equities in October bottomed out on 26 Oct, at which point the S&P/NZX50 index had dropped by 9.5% from its peak on 29 Aug. More recently, New Zealand shares, following the global pattern, have been recovering, though the index is still 5.4% below its previous peak level. Year to date, the index has delivered a modest capital gain of 3.5% and an overall return including dividend income of 6.7%.
It has been a very similar story in Australia, with a 10.8% decline in the S&P/ASX 200 index between 29 Aug and 26 Oct followed by a modest recovery since. Year to date, the index is down 2.0% in capital value, although dividend income takes the overall return into positive territory, for a small 1.7% total return.
International Fixed Interest
The outlook for international fixed interest remains difficult, principally because of the potential for further rises in U.S. dollar yields.
World shares have struggled to regain the ground lost since the sharp sell-off in October. At its current level, the MSCI World index of developed markets in U.S. dollars is still 7.8% below its recent peak on 27 Sept, and is 9.8% below its all-time high back on 26 Jan. Year to date, the index is down 3.6% in capital value and by 1.9% adding in taxed dividend income, though local investors holding the index would have experienced a small gain thanks to the 5.0% depreciation of the New Zealand dollar against the U.S. dollar.
The overall outcome has continued to depend disproportionately on the U.S. market, where the S&P500 index is up 2.0% year to date: ex the U.S. the MSCI World index is down by a substantial 11.3% in capital value. Japanese shares have been least bad, with a 2.2% fall in the Nikkei index, but European shares have been weak, with the FTSEurofirst 300 index down 6.9%. German shares have been among the weaker of the major European markets, with the DAX index down 12.3%. The U.K. has also struggled, with the FTSE100 index down 8.3%, although at time of writing there were some potentially hopeful signs that the Brexit negotiations might be reaching a negotiated conclusion rather than the "hard" Brexit that has been worrying the U.K. equity market.
Emerging markets have been worse again after initially specific worries about Argentina and Turkey spread to the asset class as a whole. The MSCI Emerging Markets index in U.S. dollars is down 16.6% year to date, and the core BRIC component (Brazil, Russia, India, China) is down by a similarly large 15.6%.
The past few months have been trying for international equity investors, and there are still significant risks to be faced. But (absent unpredicted geopolitical shocks) there is still a reasonable chance that the ongoing world business cycle will muddle through over the coming year, and provide some fundamental economic support for better equity performance.
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