Bradley Nuttall Nelson Winter Update

Bradley Nuttal Nelson News

Investment Market Review

This Issue

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.

Theresa May

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.

Donald Trump

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


    New Zealand Shares
    The local market The local market backed up a good start to the year with another strong quarter. With improving global growth expectations, still supportive credit conditions and continuing strength in overseas equity markets, the New Zealand market prospered. Leading performers included Air New Zealand (+33.4%) and Xero (+33.4%), while A2 Milk (+33.8%) and Synlait (+22.2%) also advanced on the back of recovering milk prices. Sky TV (-12.0%) was one of the worst performers, thanks in part to the cancellation of their merger with Vodafone in June.
    Source: S&P/NZX 50 Index, gross with imputation credits


    New Zealand Fixed Interest
    The Reserve Bank of New Zealand maintained the Official Cash Rate at 1.75% through both its 11 May and 22 June meetings. The release of the government budget showed the nation is in a strong fiscal position, which was supported by lower than expected unemployment figures. Even so, the Reserve Bank stressed they require a high threshold (in future data) before next raising interest rates. Yields were little changed through the quarter, which meant a return in line with expectations for this asset class. Source: S&P/NZX A Grade Corporate Bond Index


    New Zealand Property
    The domestic listed property sector followed the broad equity market up. With the Reserve Bank indicating interest rates will be on hold in the medium term, yield seeking investors returned to the relatively higher yields offered by listed property assets. Vital Healthcare Property Trust led the pack, gaining +11.04% as the market favourably priced its recent ‘acquisition spree’, which included the purchase of a private mental hospital in Sydney for A$30.3 million.
    Source: S&P/NZX All Real Estate Index, gross with imputation credits


    Australian Shares
    The Australian share market posted a loss for the quarter, down -1.6% in Australian dollar terms. Arguably the biggest news was the Australian “bank tax” that hit the big four. CBA weathered this best only falling 4% but the ANZ, NAB and Westpac each were down between 10% and 13%. With the NZD strengthening unhedged New Zealand investors which is the case with Bradley Nuttall clients saw their Australian returns fall. The index fell in NZD terms by -5.3%.
    Source: S&P/ASX 200 Index (total return)

    (hedged to NZD)


    International Shares
    With inflation decelerating amid weaker oil prices, most asset markets experienced unusually low volatility during the quarter saw global shares rose 3.2% on a hedged basis. This steady economic backdrop, combined with ample global monetary accommodation saw the European as well as the Japanese markets advance. Large cap technical companies have driven the markets upwards over the last 12 months returning: Alphabet (Google) 35%, Microsoft 38%, eBay 51%, Apple 54% and Netflex 69%. Source: MSCI World ex-Australia Index (net div.)


    Emerging Markets Shares
    Emerging markets outperformed developed markets, as exporting nations such as China and Korea rallied strongly amidst signs of an improving global growth outlook. Greece was one of the best performers, with Eurozone finance ministers agreeing to provide the financial assistance required to end uncertainty about the Mediterranean nation’s ability to meet upcoming debt repayment obligations. Source: MSCI Emerging Markets Index


    International Fixed Interest
    This quarter saw the release of positive economic data from both the US and Europe. However, with inflation remaining stubbornly subdued, central banks continue to provide accommodative monetary policy. The quarter concluded with several ‘hawkish’ comments from central banks signalling the possible need to raise rates. This caused global yields to rise steeply in the final week of the quarter, resulting in an overall small gain from the international fixed interest asset class.
    Source: Citigroup World Government Bond Index 1 – 5 Years (hedged to NZD)


    International Property
    Ongoing accommodative monetary policy benefitted international property, with American and European assets generally advancing. The S&P Developed REIT Index returned +1.92% in US dollar terms, while, conversely, the Australian listed property sector was down, with the S&P/ASX 300 A-REIT Total Return Index declining -3.05% in Australian dollar terms. A weak US dollar further reduced reported returns to New Zealand investors holding unhedged investments in this asset class. Source: S&P Developed REIT Index (total return)

    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

    The Benefits of Saving Early

    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”