It has been a good year for investors thus far, as unexpectedly lower bond yields have not only generated gains for fixed-interest investors but have also improved the perceived attractiveness of many other asset classes. It has helped that late-2018 nervousness about global growth has continued to dissipate. For now, the global economy is still likely to keep growing at a modest pace and should help underpin further investment gains. The major risks are excessive valuations (the other side of the low bond yield coin) and an unhappy outcome to the U.S. - China trade talks. In New Zealand, the outlook is for slower economic growth than previously expected, and the pace of recent asset price gains may not be sustainable against a modestly more downbeat backdrop.
New Zealand Cash & Fixed Interest
Short-term interest rates have fallen since the start of the year: The 90-day bank bill yield is down 0.2% to just under 1.8%. Long-term interest rates have continued to fall: The 10-year government is currently just under 2.0% and has been as low as 1.76% (28 March). The New Zealand dollar is a little lower, it has dropped by 0.9% in overall trade-weighted value, with a mix of gains against the yen and euro, losses against the pound, Australian dollar and Chinese renminbi, and little change in its headline U.S. dollar rate (currently 67.15 U.S. cents).
Short-term interest rates have fallen as the markets have reacted to the Reserve Bank of New Zealand’s announcement on 27 March that “Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR [official cash rate] move is down.” Forecasters, and the futures market, now lean to the view that at least one rate cut is on the cards.
Property & Infrastructure
For the year to date, the S&P / NZX All Real Estate Index has delivered a capital gain of 8.3% and a total return of 9.3% including dividends. While a solid outcome, it trailed the sharemarket as a whole, which delivered a total return of 13.0%.
Against the renewed “hunt for yield” backdrop, the A-REITs have done well. For the year to date, they have recorded a capital gain of 10.8%, matching the broader market’s 10.9%, and delivered a total return including dividend income of 11.6%, just a little shy of the overall sharemarket’s 12.3%.
Lower long-term bond yields have also enhanced the appeal of global listed property, and the FTSE EPRA/NAREIT Global Index is up 12.8% for the year to date in terms of net return in U.S. dollars. However, higher demand for property dividend yield was not strong enough to enable the sector to outpace the 15.4% net return from world shares more widely.
Listed global infrastructure has not quite matched the year-to-date gains of the wider global sharemarkets, but, for a relatively defensive sector, it has nonetheless put some good performance numbers in the window. The S&P Global Infrastructure Index in U.S. dollars is up 12.9% in capital value and has delivered 13.9% on a net return basis including taxed dividends. The net return hedged back into New Zealand dollars was almost identical (13.8%).
Despite some evidence of the economy not growing as rapidly as previously, New Zealand shares have been cracking along in the global equity-friendly environment. For the year to date, the S&P / NZX50 Index is up by 11.7% in capital value and has delivered a total return of 13.0% including dividends.
Australian shares have also done well, though the bulk of the gains occurred in January and February and prices have not pushed on a lot since then. Nonetheless, the strong start-of-year gains mean that the overall year-to-date performance shows substantial gains. The S&P / ASX200 Index is up 10.9% in capital value and up 12.3% including the dividend yield.
The recent data suggest that the economic outlook is for slower growth than previously expected.
International Fixed Interest
Yields in all the major bond markets have moved lower since the start of the year. With hindsight, it is not too hard to fathom why bond yields have fallen, against earlier expectations of a rise back to historically more normal levels: A number of central banks have come to the conclusion that their economies are not in fact robust enough to absorb the impact of higher interest rates. Planned increases in short-term interest rates are consequently being cancelled or unwound, and (as in Europe) policies of “quantitative easing” to keep bond yields low are also being maintained instead of being wound down.
World shares have extended their strong recovery from the sell-off of late 2018, when investors had become nervous about the global economic outlook.
For the year to date, the MSCI World index of developed markets is now up 14.9% (in the various markets’ local currencies) and by 14.7% in U.S. dollar terms. Including the value of taxed dividends brought the total return up to 15.4% in U.S. dollars. New Zealand investors experienced the same returns, with the kiwi dollar unchanged against the U.S. dollar over the period.
There have been broad-based gains. The U.S. has been to the fore—the S&P 500 is up 15.9%, and the tech-focussed Nasdaq Composite index is up 20.5%—but many other developed markets have also done well. European shares (as measured by the FTSE Eurofirst 300 Index) are up by 15.8%, thanks in large part to gains in France (CAC index up 18.0%) and Germany (DAX up 15.8%). And, although not quite as robust, the U.K. market, despite Brexit, has managed a decent 10.9% gain, while Japanese shares are also up, with the Nikkei gaining 10.4%.
The emerging markets have also come storming back after being one of the worst affected casualties of last year’s outbreak of nervousness. The MSCI Emerging Markets Index is up 13.0% in U.S. dollar terms, and the key BRIC economies (Brazil, China, Russia, India) are up 16.6%. China and Russia have been the big movers: In China, the Shanghai Composite Index started the year quietly but has made up for it since, with sharp rises since mid-February, and is now up 30.3%, while the FTSE Russia Index (which is U.S.-dollar based) is up 18.2%.
The global economic outlook remains reasonably supportive for equities but anything that challenges the current optimism could spark the sort of re-think that saw shares sell off late last year.
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