While the long post-global financial crisis global expansion is still intact and is providing fundamental economic support for risk assets, it is increasingly being challenged by downside risks, with trade wars and emerging-markets economies the latest worries. Risk asset classes have also become overdependent on the U.S. economy. All going well, the global and U.S. economies will continue growing through 2019, but the recent pattern of volatility looks set to become an established feature of what are now “late in the cycle” markets. In New Zealand, there is clear evidence that the economy is slowing down, with one outcome being the response from the central bank to keep interest rates low for even longer. The equity market has gone into ‘wait and see’ mode until the scale and duration of the slowdown is more visible.
New Zealand Cash & Fixed Interest
Short-term interest rates are once again unchanged. At its Aug. 9 Monetary Policy Statement, the Reserve Bank of New Zealand held the official cash rate at 1.75%, and other short-term rates are also unchanged, with the 90-day bank bill yield continuing to trade at a little under 2.0% (currently 1.91%). Local bond yields have drifted a bit lower, with the 10-year government-bond yield now just under 2.6%, some 0.2% lower than at the start of this year. The New Zealand dollar is also lower, particularly in the immediate aftermath of the RBNZ statement, when it dropped from 67.5 U.S. cents on Aug. 8 to 66.2 cents on Aug. 9. For the year to date, the kiwi dollar is down 3.5% in overall trade-weighted value.
The latest RBNZ policy statement came as something of a surprise. Up till then, the bank had indicated that it was likely to keep the OCR at its current level to late 2019 and then start raising it. This time, it said any increase would be even further away, and its forecast OCR track now has the OCR on hold out to mid-2020 and rising only very gradually thereafter. The bank left open the possibility that the OCR could be cut before then (“The direction of our next OCR move could be up or down.”).
Property
The listed property companies have continued to recover from their sell-off earlier in the year, when valuations had been threatened by fears of an imminent sharp rise in bond yields. The S&P/NZX All Real Estate Index for the year to date has delivered a capital gain of 1.5% and a total return including dividend income of 4.0%.
The A-REITs have also continued to recover from the previous fears of sharply higher bond yields. For the year to date, the S&P/ASX200 A-REITs Index is up 3.1% in capital value and has delivered a total return of 6.4%.
There has been the same pattern overseas, except that the recovery in recent months has not yet been quite strong enough to recover the sharp falls at the start of the year: For the year to date, the FTSE EPRA/NAREIT Global Index is showing a small and 1.1% loss in terms of net return in U.S. dollars.
Australasian Equities
On paper, the New Zealand share market is still showing a respectable year-to-date outcome. The S&P/NZX50 Index is up 5.2% in capital value and has given a total return including dividends of 7.0%. But the market has also retreated in recent weeks from its high point on July 6. The 1.1% decline since then reflects both a generally challenging period for equities worldwide but also stronger evidence that the local economy looks like it is heading into a period of slower growth.
Australian shares have done well by current global equity standards and have been relatively unruffled by the concerns that have held back many other markets. The S&P/ASX 200 Index is now showing a year-to-date capital gain of 4.4% and a total return of 5.8%.
Recent business surveys have been signalling a slowdown in the rate of economic growth.
International Fixed Interest
World bond markets continue to be a difficult class for investors. The outlook for the asset class remains problematic.
International Equities
It has been heavy-going for world shares. Investors have been alarmed by the trade tensions between the U.S. and China and in recent days have also had to cope with the potential ramifications of Turkey’s problems and with some disappointing earnings results from high-profile American tech companies.
Recent geopolitical tensions have taken some toll on world economic activity, though the likelihood is that the post-global financial crisis expansion is still intact and will continue into 2019.
The MSCI World Index for the year to date is up 2.2% in terms of its component local currencies but up by only 0.6% in U.S. dollars (1.9% including the taxed value of dividends). What little capital gain was available was very largely due to the U.S. market, where the S&P 500 is up 5.4%: Ex the U.S. the MSCI World would have recorded a capital loss of 6.7%. Other major markets weakened in local-currency terms: Germany was down 5.8%, the U.K. down 2.5%, European shares in general down 2.9%, and Japan down 2.5%.
Things were worse again in the emerging markets, where the MSCI Emerging Markets Index is down 6.6% in terms of the emerging markets’ own currencies and by a substantial 11.7% in U.S. dollars. The core BRIC (Brazil, Russia, India, China) economies were down 11.1% in U.S. dollars. Unsurprisingly, China has done especially badly, with the Shanghai Composite down 17.6% in yuan terms.
Recent geopolitical tensions have taken some toll on world economic activity, though the likelihood is that the post-global financial crisis expansion is still intact and will continue into 2019.
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