Bradley Nuttall Nelson Summer Update

BNL Nelson News

Investment Market Review

While market events do not often fit neatly into calendar demarcations, the December quarter rather neatly provided a set of results in stark contrast to what investors will have grown accustomed to over the previous quarters.

A significant feature has been the losses faced by fixed income investors as bond yields were repriced higher in the US on Donald Trump announcing that significant capital would be expended on infrastructure projects. Higher yields lead to losses on bonds with the Dimensional Five Year and Global Bond Funds easing by -1.0% and -2.4% respectively over the quarter.

While these fixed interest rate returns for the quarter were disappointing, the longer term returns have remained favourable.

Another notable reversal of an established trend was the relative performance between the New Zealand and Australian share markets. Over the quarter, the New Zealand share market gave back a significant proportion of its previous gains. This, too, was largely driven by bond yields with the desirability of New Zealand shares strongly linked to their relatively high dividends. So, as bond yields rise, investors leave our share market and return to bonds.

In contrast, the Australian index rebounded largely due to its high weight to banking shares (banks benefit from higher interest rates) and mining shares (commodity prices increased with the higher inflation expectations).

The New Zealand dollar did rise slightly (2.0%) against its Australian counterpart, which meant that unhedged investors faced a headwind. But nevertheless, the returns over the year are now similar across the two share markets. The NZX 50 returning 10.1% while the ASX 200 9.2% (NZ dollar terms).

However the Australian share market does have some way to go to catch up with the NZX. The International share markets performed well over the
quarter generally benefitting from an increased investor appetite for risk assets. Economic data, particularly for the US and China, continued to exceed expectations, and the additional economic stimulus anticipated under the Trump administration proved to be positive for US shares in particular. Commodity prices also strengthened, with the oil price lifting further after OPEC announced production cuts.

The majority of equity markets experienced solid gains for the quarter. Bolstered by strong returns from small cap and value shares over this period.

As for 2016, the table below summarises the key asset class returns in a little more detail by highlighting the performance of a major market index in each asset class. All returns are gross and from a New Zealand investor’s perspective (in New Zealand dollars):

As can be seen growth asset classes generally performed the best. International shares (hedged to NZD) was the best performing asset class, closely followed by Australasian shares and emerging market shares. At the other end of the spectrum New Zealand property, which was one of the darlings in 2015, only returned a little more than fixed interest in 2016.

Outlook for 2017

Looking ahead to 2017 we see as much uncertainty as ever. If 2016 was the year of upsets and surprise results (Trump and the British vote to leave the European Union), 2017 may well be the year that policymakers need to navigate a much more complex, divergent and fragile global economy.

When faced with such uncertainty, investors need to keep their ultimate objectives front-of-mind and ensure that the decisions they make align with their goals. Where an investor’s objectives are long-term in nature, they should avoid reacting to short-term market noise. The best response to uncertainty is to ensure that one’s portfolio remains well diversified to mitigate a wide range of market outcomes.

Key Market Movements For The Quarter

-6.40%

New Zealand Shares
The local market endured a weak final quarter in 2016. With overseas interest rate markets reacting swiftly to Donald Trump’s victory in the US presidential election, some of the previous strong foreign demand for New Zealand high yield stocks cooled quickly. Selected companies still performed well, including Pacific Edge +28.3%, New Zealand Oil & Gas +22.4% and Air New Zealand +18.0%. But, overall, losers outnumbered winners. Source: S&P/NZX 50 Index, gross with imputation credits


-1.69%

New Zealand Fixed Interest
The Reserve Bank of New Zealand reduced the Official Cash Rate by a further 0.25% in November. However, global and domestic bond yields continued to rise through the quarter, fuelled in part by the US Federal Reserve hiking rates in the US and additional anticipated stimulus from the Trump presidency. Although the bond sell-off over the quarter returned longer dated bonds closer to fair value, the immediate pricing impact saw the New Zealand Corporate A Bond Index deliver its worst quarterly result on record. Source: S&P/NZX A Grade Corporate Bond Index


-6.23%

New Zealand Property
The rapid shift in overseas interest rate expectations provided a strong headwind for New Zealand property assets. With relatively high yielding New Zealand property having been a popular destination for foreign yield-seeking investors in recent years, the turnaround in US interest rate expectations saw a sizable rotation away from New Zealand property this quarter. This resulted in the domestic real estate index suffering its worst quarter since the March 2009 quarter at the end of the GFC. Source: S&P/NZX All Real Estate Index, gross with imputation credits


+3.95%

Australian Shares
The Australian share market performed significantly better than the New Zealand market over the quarter, driven by the energy sector (higher oil prices) and banking shares (higher interest rates and Basel IV relief). This led to large capitalisation companies faring the best on a relative basis with the S&P/ASX 100 delivering a useful +4.57%, while the S&P/ASX Small Ordinaries shed -3.57% (both returns in New Zealand dollars). Source: S&P/ASX 200 Index (total return)


+5.27% (hedged to NZD)

+6.79%
(unhedged)

International Shares
Developed market shares performed well over the quarter, generally benefitting from an increased investor appetite for risk assets. Economic data, particularly for the US and China, continued to beat expectations, and the additional economic stimulus anticipated under the Trump administration proved to be positive for US shares in particular. Commodity prices also strengthened, with the oil price lifting further after OPEC announced production cuts. A slightly weaker New Zealand dollar saw reported returns from unhedged equities outperforming the comparable returns from hedged investments.
Source: MSCI World ex-Australia Index (net div.)


-0.13%

International Fixed Interest
The US Federal Reserve hiked interest rates by another 0.25%, and the US Federal Open Market Committee members also indicated a rise in projected interest rate movements (partly due to the anticipated stimulus from the Trump presidency). This resulted in a sharp spike in longer dated bond yields, which saw the US ten year bond yield unexpectedly rise 0.85% over the quarter and impacted yield curves around the globe. This pulled most bond indices into the negatives, with longer duration and/or credit indices generally faring worse than the relatively shorter duration Citigroup World Government Bond Index 1 – 5 Years (in NZD). … Source: Citigroup World Government Bond Index 1 – 5 Years (hedged to NZD)


-0.24%

International Property
International property fared somewhat better than domestic property during the quarter, when the main investor reaction appeared to favour some movement from bonds (and previously high yield New Zealand assets) into selected international risk assets. The S&P Developed REIT Index was negative in US dollar terms, however, a general weakening in the value of the New Zealand dollar during the quarter helped offset the bulk of the underlying asset class weakness. Source: S&P Developed REIT Index (total return)


+0.53%

Emerging Markets Shares
Returns from emerging markets shares were only mildly positive for the quarter (in New Zealand dollars). While the fundamentals in emerging markets are strong with gross domestic product growth accelerating, their prospects became a little more clouded given the stated economic and trade policies of the incoming Trump administration in the US. Egypt was again the best performing single country in the emerging markets this quarter, however, it was the double digit returns from many of the European constituents, including Russia, which helped offset weaker returns from China and India.
Source: MSCI Emerging Markets Index


All returns are expressed in NZD. It is assumed that Australian shares and international property are invested on an unhedged basis and therefore returns from these sectors are susceptible to movement in the value of the New Zealand dollar.

Families need to get together more often

I was recently reminded at a family get-together and recent family reunion, celebrating 150 years in New Zealand, that such events have a very important place in family life, especially in today’s times when people are very busy in their daily life due to professional and work-related matters.

“The more opportunity you have to spend together, the better chance you have of sharing quality experiences.”

Spot the odd one out

Family get-togethers / reunions mean different things for different people. For kids it is time to have lots of food and have fun playing with their cousins. Young kids also get the chance to meet with their relatives.

For older ones, a family reunion is a chance to see their children and grandchildren in a comfortable and stress free environment.

For the younger lot it is a chance to mingle with relatives of a similar age group and because they are of the same age group they can gain a sense of being part of a larger “whanau” or caring family community.

Knowing and understanding each other can help each other personally as well as professionally.

“Our family puts the ‘fun’ into the word dysfunctional!” – Unknown

Some relationships lose their charm either due to some misunderstanding or due to lack of communication. Potentially a family get-together is a chance to clear misunderstandings and the opportunity to enhance relations with a new perspective.

“Family is not an important thing. It’s everything.” -Michael J. Fox

So if you have the opportunity in 2017 to attend or participate in arranging a family get-together or reunion we encourage you to participate in any way you can.

If you would like to know more about this, please get in touch!

Disclaimer
This document has been provided for general information purposes only. The information is given in good faith and has been prepared from published information and other sources believed to be reliable, accurate and complete at the time of preparation but its accuracy and completeness is not guaranteed. Any information, analysis or views contained herein reflect our opinion at the date of publication and are subject to change without notice. To the extent that any such information, analysis, views or opinions may be construed as advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised advice under the Financial Advisers Act 2008, nor do they constitute advice of a legal, tax, accounting or other nature to any persons. Past performance is not indicative of future results and no representation or warranty, express or implied, is made regarding future performance. To the maximum extent permitted by law, no liability or responsibility is accepted for any loss or damage, direct or consequential, arising from or in connection with this document or its contents.