Selected Market Indicators for Period Ended 31 May 2019

May dished up a rocky month for investors, reminiscent of the equity correction seen in December last year.

In a series of negative news headlines that are starting to feel like déjà vu, US President Donald Trump announced he would be re-imposing tariffs on a range of Chinese goods; China retaliated and equity markets suffered. The resignation of Theresa May without a clear replacement further compounded investor uncertainty, whilst the European elections showcased a continent more politically fragmented than it has been for some time.
 
The NZ share market significantly outperformed its global counterparts, returning +1.1%, well ahead of the MSCI World Index which fell -5.7% over the month in local currency terms (-3.6% in unhedged NZ dollars). The defensive Global Listed Property (-0.3%) and Infrastructure (-0.4%) sectors held up well compared to their equity counterparts. Bond markets benefitted from falling bond yields and downward pressure on interest rates; NZ and Global Aggregate Bonds returned +1.2% and +1.4% for the month, respectively.
 
An estimate of the Balanced Fund gross index return based on selected market indicators for May is -0.7%. 

Significant developments include:

• In an abrupt change of attitude, US President Donald Trump imposed tariffs on $200billion of Chinese goods. China reacted in kind, threatening to impose levies of its own, notably on its exports of rare metals (a resource that has heavy US demand).
• President Trump also threatened to impose a 5% tariff on Mexican goods; further threatening Mexican officials that it could potentially be raised to 25% if the Mexican government fails to act in a more decisive manner to stem the flow of illegal immigration into the US.
• Across the Atlantic, the European Parliamentary elections, with the highest voter turnout in a decade, delivered mixed results. Support for the two traditional voting blocs, the European People’s Party (EPP) and Socialists and Democrats (S&D), declined in favour of the Greens and the pro-European Liberals and Democrats. The Eurosceptic blocs made only modest gains in contrast to bullish expectations.
• On 7 May the Reserve Bank of Australia kept its cash rate at 1.5% despite speculation that it may ease monetary policy after lower-than-expected inflation in Q1. The next day the RBNZ cut its OCR to the same level. Further cuts have not been ruled out.

 
Trans-Tasman Equities
The NZ and Australian markets were the standout performers in May, returning +1.1% and +1.7% respectively for the month, well ahead of major global peers. Interest rate cuts (and the prospect thereof) combined with slowing economic growth abroad continue to make the high dividend yielding domestic markets attractive to offshore investors.
 
Global Equities
Developed equity markets (-5.7%) struggled with deteriorating macroeconomic conditions fueled by the re-emergent threat of a global trade war. The US and Japan suffered the biggest falls, both shedding -6.4%. Emerging Markets (-6.6%) fell further than developed markets; the prospect of tariffs on China and Mexico increasing the threat to emerging economies.
 
Property and Infrastructure
With risk aversion taking hold in global equity markets the more defensive, interest rate sensitive Global Listed Property and Infrastructure sectors had a less volatile month, falling -0.3% and -0.4% respectively (NZD hedged). 12-month returns remain well ahead of global equities (+9.2 and +14.4% respectively).
 
NZ Bonds and Cash
NZ composite bonds (a combination of government and corporate bonds) had a positive month, gaining +1.2%. The NZ 10-year bond yield dropped over the course of the month, hitting a record low of 1.69% before ending the month at 1.71%. The Australian 10-year bond yield also continued its downward trend, ending May at 1.46%.
 
Global Bonds
Global aggregate bonds rallied over the month, returning +1.4% as bond yields fell sharply. Investors fled to more defensive investments as equity markets came under pressure. Government bonds performed strongly, up +1.8%, outperforming riskier corporate bonds. The 10-year US Treasury yield continued its rapid slide, falling 0.37% to close out May at 2.12%.
 
Currency
The NZ dollar continued to slide against most major currencies over the month, notably the US dollar (-2.3%) and the Euro (-1.7%). It did, however, gain against the British Pound (+1.1%). Headwinds following the RBNZ announcement, and concerns over Chinese growth and the potential economic spillover from this, further weighed down the NZ dollar in May.