Quarterly Asset Class Commentary

The final quarter of 2017 was strong for most financial markets. Many equity markets around the world posted record highs, buoyed by improving economic conditions and upbeat company profit results, while fixed interest returns were also positive.

Global equity markets had a strong December quarter with the MSCI World Index, a broad measure of global share market performance, gaining 5.3% in local currency terms. Gains in international share markets were led by Japan, with the Topix Index returning 8.7%. Emerging markets also performed very well taking into account currency movements, with the MSCI Emerging Market Index in NZD terms returning 9.4%. In New Zealand, the benchmark NZX 50 share index gained 5.9% for the December quarter.

Fixed interest returns were also positive for the period with interest rates generally little changed during the period despite economic data released in recent months indicating a strengthening global growth outlook. Within bond markets, high quality corporate bonds and inflation linked government bonds both outperformed nominal government bonds. In New Zealand, bond interest rates actually fell during the period with a slight softening in economic data, particularly business confidence, a contributor to the decline in yields.

While the current environment could continue to support investment returns in the near term, investors should be prepared for higher levels of volatility than that experienced recently. The start of 2018 has already seen investors react to the prospect of higher interest rates with many share markets selling off in February and volatility increasing. Many analysts have pointed out that the fall in share markets was likely prompted by a combination of factors rather than a deterioration in economic fundamentals. A strong US wages data release in early February added to expectations that US inflation was starting to pick up, which could lead to faster interest rate rises in the US than currently anticipated. Furthermore, with share valuations at elevated levels relative to history, investors had become less confident that recent strong gains in share prices can be sustained into the future.

Looking forward, investors should expect to see greater dispersion in performance across regions, sectors and securities as investors adjust their expectations for the future path of interest rates, global growth and company profitability. This changing environment will increasingly provide attractive opportunities for active investment managers to generate returns. Investors should remain focussed on their long-term financial goals, avoiding the temptation to change their investment portfolios in response to news or events that may be transitory or short term in nature.

Want to know more? For more information on the Scheme call 0508 intandem (0508 468 263) or visit westpacintandem.co.nz