Global equities have continued to recover from previous losses, as investors have become less concerned about recession risks and damage to the world economy from U.S-China trade frictions. A consequence has been a global rise in bond yields as investors have felt less need to buy safe-haven assets as insurance against downside risks. That said, although the economic outlook suggests ongoing global growth, which should be broadly supportive of risk assets, the modest rates of growth expected remain hostage to adverse shocks, with a renewed deterioration in trade tensions, or other geopolitical setbacks, still possible. In New Zealand, forecasters believe the economy is likely to pick up a bit from its current slow patch, probably helped by a further cut in interest rates, but it is debatable whether the improvement justifies the general expensiveness of local asset classes.
New Zealand Cash & Fixed Interest
Short-term interest rates have drifted lower: The 90-day bank bill yield fell to 1.2% after the Reserve Bank of New Zealand’s unexpectedly large 0.5% cut to the official cash rate, or OCR, in August, and has since dropped a bit more to its current 1.14%. Long-term bond yields had also been falling — the 10-year government bond yield got as low as 0.99% on August 16 — but changed course in September, following a sharp rise in U.S. bond yields. The local 10-year yield is now back up to 1.33%. The New Zealand dollar is weaker year to date, and is down by 3.1% in overall trade-weighted value, mainly due to depreciation against the yen (down 6.5%) and the U.S. dollar (down 4.6%).
There is a widespread consensus among forecasters that the RBNZ is not finished with its monetary policy easing cycle, and current futures market pricing points the same way. Among the major banks, the most likely pick is that there is another 0.25% cut in the pipeline, which would take the OCR to 0.75%, but there could well be more: At one extreme, the ANZ Bank thinks the OCR could drop to 0.25% by June next year. Whatever happens, returns from short-term assets will remain low: Year to date the S&P/NZX 90-day bank bill index has returned only 1.3%.
Property & Infrastructure
Listed New Zealand property has had a remarkably strong run. Year to date the S&P/NZX All Real Estate Index has made a capital gain of 28.1%, and a total return including dividends of 31.7% (32.5% including the value of imputation credits).
For much of this year the A-REITs have outperformed the wider share market, as investors hunted down yield in a world of low bond yields and also favoured relatively defensive assets as a hedge against high levels of global risk. Over the past month, however, the pattern broke down, and year to date the performance of the S&P/ASX 200 A-REITs Index is now a bit behind the wider market’s, with a total return of 19.8% compared with the market’s 22.2%.
The same pattern can be seen in global listed property. The absolute performance year to date has been good. The net return (including taxed dividends) in U.S. dollars from the FTSE EPRA/NAREIT Global Index is 16.9%, but it did not quite match the equivalent 18.9% from the MSCI World Index.
Global listed infrastructure has performed in line with the wider global share market. Year to date the S&P Global Infrastructure Index in U.S. dollars has delivered a net return (capital gain plus taxed dividends) of 18.6%, virtually the same as the 18.9% net return from the MSCI World Index.
New Zealand shares had been relatively resilient in July and August when global shares had been hit by the U.S.- China trade tensions, and were particularly strong in late August and early September when investors were chasing dividend yield in the wake of the RBNZ’s interestrate cut. Although prices have dropped back in recent days, year to date the S&P/NZX50 Index is still showing a substantial capital gain of 20.4% and a total return including dividends of 23.3% (24.1% including imputation credits).
Australian shares, which had been more affected by the global trade issues, have been recovering since midAugust, although they have yet to regain their late-July levels. The S&P/ASX200 Index is up 18.1% in capital value and has returned 22.2%, including dividend income. The gains have been spread across most of the major sectors, led by IT (up 28.0% in capital value) and consumer discretionary (up 23.0%), but financials (up 16.2%) have continued to be a relative laggard.
Global equities may have had a difficult few weeks, but New Zealand shares have been relatively unaffected. Prices dropped in early August, as in many overseas markets, but, unlike them, prices quickly bounced back to where they had been previously. The S&P/NZX50 Index year to date has consequently recorded a capital gain of 21.1% and a total return including dividends of 23.2% (23.8% including imputation credits).
Australia, on the other hand, conformed to the international pattern: It dropped in early August and has not regained the lost ground. Even so, the strong gains earlier this year mean that the year-to-date performance is still respectable. The S&P/ASX200 Index is up 16.3% in capital value and has returned 18.9% including dividend income.
The immediate economic outlook remains somewhat downbeat.
International Fixed Interest
World bond markets have sprung another surprise, particularly in the U.S. After dropping as low as 1.46% on September 3, only a little above its all-time low of 1.37% in July 2016, the yield on the 10-year Treasury bond abruptly changed course, and has risen smartly to its current 1.9%. The U.S. move had ripple effects on other countries’ bond yields, even in regions still committed to very stimulatory monetary policy. In the eurozone, the 10- year German government bond yield had got as low as negative 0.74% on September 3, and is now negative 0.44%. In Japan, the equivalent yield rose from negative 0.28% on September 4 to its current negative 0.15%.
World shares have almost regained all the ground lost in the trade war sell-off in July and August. At time of writing the MSCI World Index of developed market was only 0.5% below its July 26 record high. Year to date the index is up 17.5% in the currencies of its constituent markets, and up 17.1% in U.S. dollars.
Global equity performance continues to be reflect a strong U.S. market in particular. Excluding the U.S., the MSCI World Index would still have been up a respectable 12.3%, but the 20.0% gain for the S&P 500 was a key contribution to the overall outcome. Eurozone shares have done surprisingly well, given the relatively downbeat performance of the eurozone economy, with the FTSE Eurofirst 300 Index up 15.5% in euros. It also helped that Japanese shares put on a spurt in September (up 6.2% month to date), and the Nikkei is now up 9.9% for the year. Even the U.K., despite its Brexit issues, has seen the FTSE 100 rise year to date by 9.5% in sterling (though sterling is 2.0% lower against the U.S. dollar). Emerging markets have also made gains, though they have lagged the developed markets. The MSCI Emerging Markets Index in U.S. dollars is up 6.3%, and the core BRIC markets (Brazil, Russia, India, China) are up 10.2%, with Russia the big winner: The FTSE Russia Index is up 34.9% in U.S. dollars.
The outlook depends on four key factors: the ongoing health of the U.S. economy and how it will affect U.S. corporate profits; the prospects for the wider global economy; the ultimate landing place of the U.S.-China trade frictions; and any geopolitical surprises.
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