Global financial markets have continued to be choppy as investor sentiment has reacted to the twists and turns in US-China trade relations and to the flow of data on the outlook for the global economy. Latterly the trade war news has been modestly better, benefiting equities but triggering a sell-off in bonds. The central outlook remains for modest growth in the world economy—the IMF, for example, thinks 2020 will be a bit better than this year—but with significant risks to the downside, so while growth assets have economic support, investors are likely to experience further volatility along the way as risks loom larger or withdraw. In New Zealand, recent business and other surveys have generally been downbeat, and while 2020 could see some modest pickup in business activity, local assets look rather expensive for what is in prospect.
New Zealand Cash & Fixed Interest
Short-term interest rates have moved a bit lower, and are trading at just above the 1% mark: the 90-day bank bill yield is currently 1.05%. Long-term interest rates have followed the global trend: the local 10-year government bond yield hit a low point in early October (0.99% on 4 October and again on 8 October) before rising to its current 1.25%. The New Zealand dollar has weakened, and year to date is down 3.9% in trade-weighted value. It is down 5.2% in terms of its headline rate against the US dollar.
The Reserve Bank of New Zealand said at its most recent interest rate review on 25 September that “there remains scope for more fiscal and monetary stimulus,” and there is a very widespread consensus that further interest rate cuts are indeed on the way, even if banks have different views on how large the cuts will be. The Bank of New Zealand expects one 0.25% cut in the cash rate to 0.75%; Westpac expects two; the ANZ Bank expects three. The outlook is for even lower returns from bank deposits.
Property & Infrastructure
Year to date, the returns from the listed property shares have been very strong. The S&P/NZX All Real Estate index has made a capital gain of 29.3%, with a total return including dividends of 32.9% (33.8% for those who can use the value of imputation credits).
Year to date, the A-REITs have broadly matched the returns from the wider sharemarket. The total return (capital gain plus dividends) from the S&P/ASX 200 A-REITs index is 20.9%, a tad behind the 21.9% from the S&P/ASX 200 Index.
Global listed property has done a bit better, and modestly outperformed global equities as a whole. The net return (including taxed dividends) in US dollars from the FTSE EPRA/NAREIT Global index is 21.3%, ahead of the equivalent 18.5% from the MSCI World index.
Like listed property, global listed infrastructure has also modestly outperformed the wider global sharemarket. Year to date the S&P Global Infrastructure index in US dollars has delivered a net return (capital gain plus taxed dividends) of 20.7%, versus the MSCI World index’s 18.5%. The result was a little stronger (21.5%) if hedged back into New Zealand dollars.
A rise in global equity prices in recent weeks has been mirrored in New Zealand, where the S&P/NZX50 index year to date is now up 21.9% in capital value and has returned 25.6% including dividend income (26.6% including imputation credits).
Australian shares have also made progress. Year to date the S&P/ASX200 index is up 17.81% in capital value and has returned 21.9% including the value of dividend income.
The latest crop of business indicators does not make for comforting reading for local equity investors. While there has been an active debate about the contrast between gloomy business confidence polls and rather more upbeat actual outcomes, the latest signals are rather worrying.
International Fixed Interest
Both bond and equity markets have continued to be very sensitive to changes in investor sentiment about the outlook for the world economy, and in particular about how trade frictions will play out. Over the past month, there has been some limited progress in the US-China trade talks, and for investors this has translated into less demand for the relative safety of bonds, and yields have risen. At its recent low point the 10-year US bond yield got to 1.53% on Oct. 8, but in the more positive trade environment since then it has risen back up to 1.8%.
Some progress on the US-China trade disputes has helped shares make progress in recent weeks. Year to date, the MSCI World index of developed markets is up 16.7% in the currencies of its component markets, and up by a very similar 16.5% in US dollars.
The US market continues to lead the way: the S&P 500 is up by 19.1% and the Nasdaq up by 21.9%. Eurozone shares have confounded local economic sluggishness, with the FTSE Eurofirst 300 index up 15.3% in euros. Japan has also contributed, with the Nikkei index up 12.4% in Japanese yen. The UK has unsurprisingly been at the back of the pack, with the FTSE 100 up by 6.3% in sterling.
Although they have not matched the developed markets, emerging markets are also ahead for the year, and the MSCI Emerging Markets index in US dollars is up 6.0%. The key BRIC markets (Brazil, Russia, India, China) are up 8.7% in US dollars, helped by a particularly strong performance from Russian shares: the FTSE Russia index is up 36.2% in US dollars.
It would be easy to take fright at the IMF’s latest update to its World Economic Outlook report, and many people did, pointing to the downward revisions made since its previous (April) take. “The global economy”, the IMF said, “is in a synchronized slowdown, with growth for 2019 downgraded again — to 3 percent — its slowest pace since the global financial crisis.
Recent international equity performance has been a bumpy ride, particularly in late 2018 when sentiment turned deeply pessimistic about global growth. But there is still a reasonable chance of the current global expansion carrying on into next year, although at the same time investors are likely to want to carry adequate portfolio insurance against the various risks that might derail it.
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