Investment Market Review
Investment Market Review
Our summary of what happened in the
markets over the last quarter.
Key Market Movements
A brief look at where the key asset classes moved last quarter.
The Benefits of Saving Early
We have all heard about the benefits of compounding interest, here’s some surprising examples.
The June quarter saw markets in the main continue their positive trends although at subdued rates.
Economically speaking, Europe is in better shape than it was a few years ago. Every country in the EU is now growing (even Greece…just). Data for the first quarter of 2017 showed the euro zone economy picking up more momentum.
In terms of its politics, Europe is looking more progressive. Austria, the Netherlands, and now France have all voted in pro-European leaders, rather than inward-looking populists. The next significant event occurs in September when Germany heads to the polls. Angela Merkel – one of the EU’s biggest supporters – is the odds on favourite.
The uplifting result in France could not have been in greater contrast to the almost farcical outcome of the UK elections in early June.
In mid-April, when Theresa May called for an early election to attempt to shore up her position at the Brexit negotiating table, the
Conservatives held a 19 point lead in the polls. Only seven weeks later, they suffered the humiliation of having to form a minority government.
It was far from the unifying result Theresa May had hoped for. With inflation on the rise and Britain, for the first time since the mid-1990s, holding the mantle of the slowest-growing country in the European Union, the Conservatives headed into the Brexit negotiations with their tails between their legs.
In any commentary on political events one of course, cannot forget about Donald Trump. The US election may have been in November last year, but it seems the world is still struggling to come to grips with ‘The Donald’.
The best thing Trump supporters can find to say about the US president is that ‘he does what he says he will do’. That might have been perceived as a bigger virtue, except the things he says he will do are usually divisive, often strategically and ethically questionable, and nearly always controversial.
Scrapping US involvement in the Trans Pacific Partnership trade deal and failing to ratify the Paris Accord on climate change are two obvious examples.
While global investors might well be concerned about some of the policies emanating from the Oval Office promoting increased US separatism and greater racial inequality, that hasn’t translated into any reduced demand for US business output or debt securities.
In that sense, the market response is entirely rational. Regardless of the latest Trump tweet or seat-of-the-pants policy initiative, the demand for Big Macs, or iPhones or Cadillacs, hasn’t been affected, and is unlikely to be. Consumerism is inherently apolitical.
As if to reinforce this, the headline US S&P 500 Index registered a gain of 3.1% for the quarter and is now up 17.9% for the last 12 months, and 14.6% p.a. for the last five years. Other notable equity market results for the quarter were in Japan, where the Nikkei 225 gained 6.1%, and in France, where the CAC 40 Index gained 2.4%. In fact, it was a solid quarter for most developed share markets, with only five of the 23 developed markets tracked by MSCI indices returning negative results.
Emerging markets were, in typical fashion, more volatile. Fortunately, that volatility was more positive than negative this quarter, with the MSCI Emerging Markets Gross Index up 6.4% in US dollar terms. Some of the notable individual results contributing to this
performance came from China +11.0% and Korea +12.8%. At the other end of the scale, the Russian share market fell -6.0%, hurt by ongoing oil price weakness and by the Trump administration, against expectations, not repealing sanctions imposed in 2014 which punished Russia for its role in the Ukraine crisis.
The local New Zealand share market delivered a strong result, with the S&P/NZX 50 Index (gross with imputation) gaining 5.9%. This was comfortably ahead of the result of our Australian neighbours, where the S&P/ASX 200 Index returned -1.6%.
New Zealand’s strong share market performance may partly be a reflection that economic conditions here continue to look solid and business confidence remains strong. Positive business sentiment certainly bodes well for the future growth rates and profitability of New Zealand facing businesses. On the other hand, while overall Australian data also generally continues to beat expectations, the tailwinds supporting economic growth in Australia appear less consistent, as a spate of company earnings downgrades in June served to highlight.
Over the quarter, the New Zealand dollar strengthened against both the US dollar (up 4.5%) and the Australian dollar (up 3.9%). A stronger NZ dollar has the effect of reducing the New Zealand dollar value of any unhedged assets denominated in either US or Australian dollars, and that contributed to slightly lower reported returns this quarter.
Global bond markets had been relatively uneventful for much of the quarter, although this changed rather sharply towards the end of June when European Central Bank President, Mario Draghi, announced that “the global recovery is firming and broadening and a key issue facing policymakers is ensuring that this promising growth becomes sustainable.”
These comments resonated strongly with the market, as they coincided with comments made by Bank of England
Governor, Mark Carney, about the potential need to reverse the post Brexit rate cut in the UK, and comments from Bank of Canada Governor, Stephen Poloz, about the potential need to reverse the post oil price crash (2014/2015) rate cut in Canada. In addition, earlier in the month the US Federal Reserve had already signalled its determination to progressively remove stimulus in the US by lifting the Federal Funds rate from 1.00% to 1.25%.
What was less anticipated was the Federal Reserve retaining their future rate projections of one increase in 2017, followed by three hikes in 2018, and another three hikes in 2019.
This is almost the exact opposite of the approach being taken by our own Reserve Bank. In last month’s Monetary Policy Statement, the Reserve Bank looked through a string of firmer New Zealand inflation indicators and maintained their earlier projections that New Zealand rates will remain at record lows until 2019. It is apparent that the Reserve Bank believe that raising rates too early, something they regretted in doing in 2014, could undermine domestic growth.
Even though all bond markets felt some impact from Draghi’s comments and spiked upwards over the last week in June, it was not a sizable enough reaction to impact returns greatly. By the end of the quarter the Citigroup World Government Bond Index 1-5 Years (hedged to NZD) had gained 0.59%, while the slightly longer duration Bloomberg Barclays Global Aggregate Bond Index (hedged to NZD) advanced 1.22%. These were both satisfactory results, given the still compressed global yield curves.
All in all, while it was an extremely interesting quarter on the global stage, it was a relatively quiet quarter in the markets.
Key Market Movements For The Quarter
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
We have all heard about the benefits of compounding interest on ones long term investments. But how many of you have personalised for yourself or more importantly discussed this with your children or grandchildren, with actual examples?
Do I see any hands up? Unfortunately, many of us have been tainted to some degree by insurance endowment policies that attracted excessive entry as well as high ongoing fees. As a consequence, they didn’t provide a viable or prudent option for one’s retirement. Fortunately, those days are now by and large gone. There is now a range of investment options available including KiwiSaver, selecting your own funds and / or opening an account with your financial adviser.
“Benefiting from the power of compounding returns will significantly influence the choices your children and grandchildren will enjoy in their retirement”
In this example Susan invests a total of $75,000 over a 10 year period between 25 and 35 years of age. She based on the assumption that her investments will grow in net terms 6.0% p.a (after providing for tax and fees) and is projected to have $601,000 at 65.
Chris on the other hand has invested a total of $232,500 however, commenced saving when he was 35 and continuing through to and including his 65th year. The sum available based on the returns assumptions in his 65th year being $636,000.
Lyn has contributed $300,000 saving $7,500 each year for 40 years and is projected to have available $1,160,000 in her 65th year.
“Knowing about compounding returns and actually doing it, is what’s important”
The theory being the longer the funds are invested the greater the likelihood they have to grow.
Another example could be you contribute $1,500 per year each year into an account until your grandchild is 20 years old. Under this example you have contributed $30,000 and in their 65th year they are projected to have available $760,000.
Clearly the assumptions used and basis of returns calculation are somewhat simplistic with no provision made for inflation. When developing retirement plans, we use statically based modelling tools, Monte Carlos Modelling. Notwithstanding this, the fact remains:
“the earlier one starts saving, or as a grandparent you assist your children / grandchildren, the greater the benefit”