There has also been a slew of other worries, including slower eurozone growth and Brexit. However, relatively defensive sectors such as property have benefited as refuges from the market volatility. Bond investors have had some relief from previous losses, as U.S. bond yields have fallen (at least for now). Looking ahead, while all the recent focus has been on downside risks, a broader perspective should allow for the possibility that the long post-GFC economic recovery is still intact, although there is the potential for ill-advised political brinkmanship to derail the cycle. At home, the latest big set-piece—the government's half year economic round-up—suggests New Zealand is on track for further economic growth of some 3% a year, which should underpin modest growth in corporate profits.
New Zealand Cash & Fixed Interest
A "steady as she goes" monetary policy stance means that, once again, short-term interest rates have shown little change, with the 90-day bank bill yield continuing to trade just below 2.0%. In its latest Monetary Policy Statement the Reserve Bank of New Zealand dropped its previous reference to the possibility of cutting interest rates, but any eventual increase still looks a long way away. As the bank said, “We expect to keep the OCR [official cash rate] at this level [1.75%] through 2019 and into 2020."
Long-term interest rates have followed the lead of the U.S. bond market, peaking in November and falling since, with the 10-year government bond yield going a little over 2.8% on 12 Nov, but has since dropped back to 2.5%. The New Zealand dollar has risen against the U.S. dollar in recent weeks, and is now trading at USD 68.4 cents. This recent rise means that the kiwi dollar is now marginally up (by 0.7%) in overall trade-weighted value for the year.
Listed property has performed solidly. Year-to-date, the S&P/NZX All Real Estate index has made a capital gain of 3.7% and delivered a total return including dividends of 8.8%. Listed property has handily outperformed the wider sharemarket for a variety of reasons. As equity markets became more nervous in October and November, investors shifted to more defensive sectors, and listed property got a further boost from the drop in bond yields from mid-November onwards.
The A-REITs have performed very similarly to their New Zealand counterparts, and for the same reasons, with the S&P/ASX 200 A-REITs index also picking up after Australian bond yields started to fall. Year-to-date, the index is up by 1.0% in capital value and has delivered a total return of 4.3%, well ahead of the wider market's 3.8% loss.
International property has also outperformed global equities, although has not fully preserved investors’ capital. Year-to-date, the FTSE EPRA/NAREIT Global index is down 2.1 % in terms of net return in U.S. dollars, a better outcome than the 5.9% loss from the MSCI World index on the same basis.
The New Zealand share market has been relatively resilient against a background of global equity weakness. Although the market weakened in October in line with the overseas pattern, more recently, it has held up better than its equivalents overseas, and year-to-date the S&P/NZX50 index is marginally ahead (up 0.3%) in capital value, and has provided a total return including dividends of 3.9%.
However, Australian shares have fared badly. On top of weak global equity sentiment, the financials have continued their horror run with further revelations from the Royal Commission of poor behaviour have helped the financials to a 15.9% year-to-date capital loss.
International Fixed Interest
The outlook for international fixed interest remains difficult and continues to be dominated by what is happening in the U.S.
World equity markets have gone through various mini-cycles in recent months, with periods of investor pessimism alternating with periods of renewed optimism. Cumulatively, however, negativity has been dominant, and after October’s large sell-off shares have dropped a bit further again in recent weeks. Year to date the MSCI World index of developed markets in U.S. dollars is down 7.6% in capital value and by 5.9% including taxed dividend income.
Until very recently, the overall return from the asset class had been kept up by ongoing gains for American shares, but this unravelled over the past month as investors started to fret about the U.S. economic outlook. The S&P500 is now down 2.8% for the year. A setback to the previously high-flying tech sector did not help, though for the moment the tech-heavy NASDAQ Composite index is still marginally ahead (0.1%). Other major markets lost ground, with Japan’s Nikkei down 6.1% and eurozone shares down 10.3% on the basis of the FTSE Eurofirst300 index. The U.K. remains embroiled in Brexit problems, and the FDTSE100 index has lost 11% in value this year.
Emerging markets, which had been weak in any event even before this latest setback to the developed markets, have continued to struggle. The MSCI Emerging Markets index in U.S. dollars is down 16.1% year to date, and the key BRIC economies of Brazil, Russia, India, China are down by 13.9%.
In the current climate, news is being read from a bearish perspective, and investor anxiety may continue to rule the market for some time yet.
While there are clearly a series of near-term challenges, notably including the impulsiveness of
U.S. of economic and foreign policy, there is still a reasonable chance that in the background the long post-GFC global business expansion is still intact.
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