Bradley Nuttall Nelson Winter Update

BNL Nelson News

Investment Market Review

For 84 of the 91 days in the quarter, domestic international and emerging market equities, property and fixed interest markets were reporting positive gains.

Then ….just before the end of June, UK citizens voted in a referendum for the nation to withdraw from the European Union. The result, which defied the expectations of many, led to market volatility as participants weighed up possible consequences.

Reporting on the result, The Washington Post said the vote had “escalated the risk of global recession, plunged financial markets into freefall and tested the strength of safeguards since the last downturn seven years ago”.

The Financial Times said ‘Brexit’ had the makings of a global crisis. “(This) represents a wider threat to the global economy and the broader international political system,” the paper said. “The consequences will be felt across the world.”

After the initial “shock” markets have functioned normally. Indeed, within a few weeks of the UK vote, Britain’s top share index, the FTSE 100, hit 11-month highs. By mid-July the US S&P 500 and Dow Jones industrial average had risen to record highs. Shares in Europe and Asia also strengthened after dipping initially on the vote.

On currency markets, the pound sterling fell to a 35-year low against the US dollar in early July. The Bank of England later surprised forecasters by leaving official interest rates on hold.

The Brexit vote did lead to initial volatility in markets, but this has not been exceptional or out of the ordinary. One widely viewed barometer is the Chicago Board Options Exchange’s volatility index or ‘VIX’. Using S&P 500 stock index options, this index measures market expectations of near-term volatility.

None of this is intended to downplay the political and economic difficulties of Britain leaving the European Union, but it does illustrate the dangers of trying to second guess markets and base a long-term investment strategy on speculation.

Another recent example of this tendency came shortly after the Brexit vote, in the Australian general election, where a much closer-than-expected result sparked media speculation of severe economic and market implications.

Pessimism sounds smart. It seems somehow to make more sense. Taking action at a time of “crisis” seems logical.

However investing is about probabilities. Over the last 100 years, markets have gained around 10 0% a year. Over the last 30 years, returns have been slightly higher at 10.8% a year.

The three decades that included the ’87 crash, two Iraq wars, 9/11, the tech crash, the GFC and the mining boom and bust.

Inevitability, fears fade and markets recover; often much faster than seems likely at that moment when fear is the overriding emotion. Sticking to your long term strategic investment plan, even when the outlook suddenly seems challenging, remains the most prudent way of ensuring that you achieve your long term goals and objectives.

Markets never move in straight lines

Key Market Movements


New Zealand Shares
Although the majorities of shares in the NZX 50 were down in June, in large part due to the Brexit fallout at the end of the month, the market overall for the quarter posted another sound result. Orion Health Group was the leading performer in the quarter + 41 to 8.2%, with Z Energy, Xero and diligent also producing strong double-digit gains. With oil prices appreciating more than 25% for this the quarter Air New Zealand suffered the largest price decline of -26.7%.
Source: S&P/NZX 50 Index


New Zealand Fixed Interest
The Reserve Bank of New Zealand’s April and June monetary policy statements affirmed local interest rates remaining on hold, but noted house prices and dairy incomes both pose some financial stability risks. With markets continuing to price in further modest interest rate cuts, the New Zealand corporate a Bond index delivered another solid result for the quarter.
Source: S&P/NZX A Grade Corporate Bond Index


New Zealand Property
The performance of the domestic listed property sector closely mirrored that of the wider New Zealand equity market. There was a relatively wide dispersion of returns across the sector, with Vital Healthcare Property Trust delivering a sector leading +10.36% while Property For Industry returned -2.68%. Of the larger index constituents, Kiwi property group produced a strong +5.99% for the quarter.
Source: S&P/NZX All Real Estate Index


Australian Shares
Although the Australian market was up in local currency terms (the ASX 200 was +.3 .94% in Australian dollars), a stronger New Zealand dollar meant that returns to unhedged investors were negative. Small capital capitalisation companies outperformed large capitalisation companies during the quarter.
Source: S&P/ASX 200 Total Return Index

+1.80% (hedged to NZD)

-2.20% (unhedged)

International Shares
Most markets were mildly positive in advance of the Brexit referendum, before initially collapsing after the shock “leave” vote was confirmed. Markets were continue to recover as the quarter ended, as investors began to understand the Brexit process would take some time. A much stronger New Zealand dollar over the quarter saw all reported returns from hedged equities outperforming the comparable returns from unhedged investments.

Source: MSCI World ex-Australia Index


International Fixed Interest
Once again the Brexit vote had a significant bearing on the performance of this asset class during the quarter as most long international interest rates spiked downwards in response to the outcome of the referendum. This last quarter rally saw international bond markets provide another solid quarter.
Source: Citigroup World Government Bond Index 1 – 5 Years (hedged to NZD)


International Property
With further yield compression in global bond markets and at least a temporary increase in equity market risk aversion following the Brexit result, global listed property delivered a strong performance. The S & P REIT index was up +4.95% in US dollars and 1.6% in New Zealand dollar terms. The Australian listed property sector was strong again, with the S&P ASX 300 A -REIT Total Return Index gaining 9.23% in Australian dollar terms.
Source: S&P Developed REIT 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.

New Global Sustainability Trust

A growing number of people are looking at ways to align their investment choices with their personal philosophies. Since 2006, Dimensional has offered U S mutual funds using social screens to meet a growing demand for responsible and sustainable investments.

Environmental and Sustainability Screens

The Fund screens across and within industries supporting sustainable business practices at both a portfolio and industry level. In particular the Fund screens out companies that are harmful to the environment, and in particular, carbon emissions or fossil fuels.

Below are modelled the reductions in carbon emission associated with the application of the Fund’s screens.

The Fund also seeks to screen out companies that potentially or are actually affecting the planet by way of:

  • Land use and Biodiversity
  • Operational Waste
  • Toxic Spills and Releases
  • Water management

Social Screens

The Fund also applies social screens and excludes companies that receive a significant portion of their revenue from; adult entertainment, alcohol, gambling and tobacco. The Fund also excludes companies associated with the manufacturing of ammunitions and munitions systems and components.

New Zealand and Australian Investment

In conjunction with this new Fund we have developed our own in house Australasian share offering that applies similar criteria to those of the international share Fund. Thus enabling those wishing to invest in a socially responsible manner are now able to.

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

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