Quarterly Asset Class Commentary
The three months to March 2018 saw a big change in market dynamics relative to the prior year, and mixed returns across the major asset classes. Bonds and cash delivered positive performance while many equity markets fell following a period of strong returns.
Global share markets ended the quarter down 2.0%1, and experienced volatility not seen for several quarters. Much of this was driven by expectations of rising inflation and concerns around the possibility of a trade war between China and the US. The New Zealand equity market was not immune from the influence of global markets, and fell 0.9%2. In general, most equity markets recovered post quarter end, providing small positive returns for the month of April.
Fixed interest markets performed more strongly than their equity counterparts, posting small positive returns for the quarter. New Zealand government bonds3 returned 0.5% and the global bond market4 returned 0.16%. The New Zealand bond market’s outperformance was driven by a number of factors, including the healthy state of the New Zealand economy, the outlook for short term interest rates relative to the US (the US Fed is hiking while the RBNZ is on hold), and expectations that the new government will be fiscally responsible. As in equity markets, fixed income markets also experienced an increase in volatility during the quarter, driven by a short-lived increase in fears that inflation may be increasing faster than expected in the US.
More recently and as we look ahead, we expect the global economy to remain on a sound footing, and growth to remain solid. This should benefit company profitability and help to support returns from equities - at least in the near term. With inflationary pressures likely to continue to build, we expect to see upwards pressure on long dated bond interest rates in coming months, constraining returns from fixed interest investments.
In this environment, we anticipate more variation in investment returns than in recent years, at both an asset class level, and across regions, sectors and securities within each asset class. Increasing variation, and changing drivers of market returns mean it is increasingly important to be selective about where, and what securities and assets to invest in. There will be winners and losers. Good quality active fund managers will use this as an opportunity to add value as markets rise, to dampen volatility, and to help protect capital for investors as markets fall.
1MSCI ACWI ex Aus 69% hedged NZD
2S&P/NZX50 Index Gross
3 S&P/NZX NZ Government Bond Index
4Composite of Bloomberg Barclays Global Treasury 1-20 yr NZD Hedged and Bloomberg Barclays Global Corporate 1-10yr NZD Hedged
Source: Willis Towers Watson
Global share markets ended the quarter down 2.0%1, and experienced volatility not seen for several quarters. Much of this was driven by expectations of rising inflation and concerns around the possibility of a trade war between China and the US. The New Zealand equity market was not immune from the influence of global markets, and fell 0.9%2. In general, most equity markets recovered post quarter end, providing small positive returns for the month of April.
Fixed interest markets performed more strongly than their equity counterparts, posting small positive returns for the quarter. New Zealand government bonds3 returned 0.5% and the global bond market4 returned 0.16%. The New Zealand bond market’s outperformance was driven by a number of factors, including the healthy state of the New Zealand economy, the outlook for short term interest rates relative to the US (the US Fed is hiking while the RBNZ is on hold), and expectations that the new government will be fiscally responsible. As in equity markets, fixed income markets also experienced an increase in volatility during the quarter, driven by a short-lived increase in fears that inflation may be increasing faster than expected in the US.
More recently and as we look ahead, we expect the global economy to remain on a sound footing, and growth to remain solid. This should benefit company profitability and help to support returns from equities - at least in the near term. With inflationary pressures likely to continue to build, we expect to see upwards pressure on long dated bond interest rates in coming months, constraining returns from fixed interest investments.
In this environment, we anticipate more variation in investment returns than in recent years, at both an asset class level, and across regions, sectors and securities within each asset class. Increasing variation, and changing drivers of market returns mean it is increasingly important to be selective about where, and what securities and assets to invest in. There will be winners and losers. Good quality active fund managers will use this as an opportunity to add value as markets rise, to dampen volatility, and to help protect capital for investors as markets fall.
1MSCI ACWI ex Aus 69% hedged NZD
2S&P/NZX50 Index Gross
3 S&P/NZX NZ Government Bond Index
4Composite of Bloomberg Barclays Global Treasury 1-20 yr NZD Hedged and Bloomberg Barclays Global Corporate 1-10yr NZD Hedged
Source: Willis Towers Watson
This information has been prepared by Mercer (N.Z.) Limited for general information only. The information does not take into account your personal objectives, financial situation or needs.This information has been prepared by Mercer (N.Z.) Limited for general information only. The information does not take into account your personal objectives, financial situation or needs.
6 June 2018