While geopolitical risks remain high, at the moment investment sentiment has turned more positive on a potential (if only partial) resolution of the U.S.-China trade disputes. Growth assets have consequently benefited, while the prospect of a pick-up in world growth, and reduced demand for defensive boltholes, have led to sell-offs for bonds and bond proxies. Provided geopolitical risks do not re-emerge to disturb business and investor confidence, the central outlook is for ongoing global growth into 2020, albeit with the balance of risks loaded to the downside. In New Zealand, recent data has been modestly encouraging about the prospects for business activity, although several local asset classes continue to look expensive.
New Zealand Cash & Fixed Interest
There has been little change to short-term interest rates, with the 90-day bank bill yield a little above 1% (currently 1.09%). Long-term yields continue to feel the impact of overseas trends: in the U.S. the 10-year Treasury bond yield has risen by 0.35% since early October, and its local equivalent has done much the same, from just over 1.0% in early October to 1.44% now. Although there is still a good deal of day-to-day volatility, in overall trade-weighted value, the New Zealand dollar appears to have broadly stabilised in recent months. Its weakness early in the year, however, means that year-to-date it is still down 3.6% in overall value.
Most forecasters had picked that the Reserve Bank of New Zealand, or RBNZ, would cut interest rates again at its Nov. 13 Monetary Policy Statement, but instead it elected to leave the official cash rate at 1%. While it is still open to the idea of cutting rates in the future, saying “We will add further monetary stimulus if needed”, its own forecast for the cash rate suggests at most there might be one further 0.25% cut in the pipeline. Bank depositors can at least take some comfort from the fact that returns have, finally, gone as low (give or take) as they are going to, but there is unlikely to be any improvement from current low levels for some considerable time. The bank’s forecasts suggest it will be late 2021 or early 2022 before rates start rising again.
Property & Infrastructure
Investors have had a very good run in listed New Zealand property. Year-to-date, the S&P/NZX All Real Estate index has made a capital gain of 22.4%, and delivered a total return including dividends of 26.0% (26.8% with imputation credits). The year-to-date return, while strong and ahead of the wider sharemarket, has eased back in recent weeks as prices have retreated from earlier levels with REIT prices dropping 5.5% since a recent high on Oct. 22.
The A-REITs have done well year to date. The S&P/ASX 200 A-REITs index is up 20.0%, and has returned 23.6% including dividends. The sector has slightly lagged the wider sharemarket with the total return from the S&P/ASX 200 at 25.1%.
Global listed property has also produced good returns, with the FTSE EPRA/NAREIT Global index in U.S. dollars up 16.5% in capital value and providing a total return including dividends of 20.5%. As with the wider equity markets the North American markets were strongest (25.3% return), while emerging markets (14.4%) and the Asia-Pacific region (13.9%) were the back markers.
Year-to-date, the S&P Global Infrastructure index in U.S. dollars has delivered a net return (capital gain plus taxed dividends) of 21.4%, modestly underperforming the MSCI World’s 23.4%. Hedging back into New Zealand dollars improved the return to 22.6%.
Australasian Equities
New Zealand equities have had a good year to date, with the S&P/NZX50 index year up 19.9% in capital value and returning 23.6% including dividend income (24.7% counting the value of imputation credits).
Australian shares have also done well. The S&P/ASX 200 index year to date is up 20.3% in capital value and has returned 25.1% including dividends.
International Fixed Interest
As has been the case for some time, international bond and equity markets have been very responsive to changes in sentiment about global growth. Over the past month, sentiment has improved significantly, mainly in response to signals the U.S.-China trade frictions might be reaching at least a provisional truce on some of the items in dispute.
Bond yields have consequently risen: the 10-year Treasury yield in the U.S. is now 1.83%, well up on its recent cyclical low below 1.5% in early September. Yields have also risen in other major bond markets. In Japan, for example, the 10-year yield was nearly negative 0.3% in early September, and is now negative 0.07%.
International Equities
It has been a good month for world shares, which have been heartened by the Fed’s latest interest rate cut and by signs of progress on the U.S.-China trade dispute. Much of the media attention has focused on the S&P 500 index in the U.S. hitting new record highs. It hit a new peak on Oct. 21 and has moved higher since. World shares have got less notice, but they too have moved into all-time record territory. In the MSCI World index of developed markets in U.S. dollars hit an all-time high on Nov. 1 (going past its previous peak on Jan. 26, 2018) and has also progressed further since then.
Year-to-date, the MSCI World index of developed markets is up 21.2% in U.S. dollars. Performance continues to be boosted by the U.S. markets—ex the U.S. the World index is up by 15.6%—as the S&P 500 (up 24.3%) and the Nasdaq index (up 28.6%) have performed particularly strongly. Eurozone and Japanese shares have also done well, and among major markets, the only clear laggard is the U.K., where Brexit uncertainties have held the FTSE 100 to a relatively small 8.5% gain.
Emerging markets have not done as well as the developed economies: the MSCI Emerging Markets index in U.S. dollars is up 8.6%, and the core BRIC markets (Brazil, Russia, India, China) are up 10.5%. Russia has been the key contributor, with the MSCI Russia index up 34% in U.S. dollars. The asset class threw up some reminders of the relative political instability of the asset class, notably widespread protests in Chile, which until recently had been regarded as a relatively rare example of good economic management in Latin America. The MSCI Chile index is down 18.1% in U.S. dollars year to date.
It remains a reasonable investment view to expect more of the same. But the ongoing level of risk and uncertainty also makes it advisable to continue to build protection into portfolios (through overall diversification and through more defensive positioning within asset classes) against the real risk that the global equity market’s long run of good fortune comes to an end.
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