The economic outlook has perked up, due to strong economic data out of the U.S., modestly better data in the rest of the world, and, critically, a trade agreement between the U.S. and China, which, with the British election results, has helped defuse investor anxieties about global growth. Risks have not disappeared entirely, and trade wars, Brexit, or other shocks could still upset the apple cart; but for now, risk assets have a tailwind behind them that is supportive for equities into 2020. Bonds and bond proxies are less well placed, as U.S. bond yields look likely to rise. In New Zealand the economic outlook has also improved, partly thanks to more supportive fiscal policy being deployed. Further cuts in interest rates from the Reserve Bank may not now be needed.
New Zealand Cash & Fixed Interest
Short-term interest rates have moved a tad higher. They were just under 1.1% ahead of the Reserve Bank of New Zealand’s monetary-policy decision on Nov. 13, but increased to 1.27% immediately afterwards. The OCR remains at 1.0% and currently the 90-day bank-bill yield is just above 1.2%. Long-term yields have continued to track the U.S. bond market. Local yields bottomed out in September, when the 10-year government-bond yield was around 1.0%, and has risen now to over 1.5%. The New Zealand dollar year to date has dropped 1.0% in overall trade-weighted value.
Opinion is changing on the outlook for short-term interest rates and the ANZ now sees only one 0.25% cut in the OCR in the middle of next year, with the futures market currently pricing no change over the next year. At least investors with money in the bank can take the consolation that already very low returns will not get even worse for the time being.
Property & Infrastructure
New Zealand listed property has performed strongly. Year to date the S&P / NZX All Real Estate index is up 22.4% in capital value and has returned 27.4% including dividends (28.5% for those able to use imputation credits). The return almost exactly matched the 27.6% return from the overall share market.
The S&P/ASX 200 A-REITs Index year to date has recorded a solid capital gain of 14.4% and delivered a total return, including dividends, of 17.8%. However, the return was well behind the 24.2% achieved by the wider share market.
The same pattern—good absolute return, not so impressive relative return—is also evident in global listed property. The FTSE EPRA / NAREIT Global index in U.S. dollars is up 19.9% in terms of total return, adrift of the 26.2% total return from the MSCI World Index.
Australasian Equities
New Zealand equities have had a good year to date, with the S&P/NZX50 index year up 19.9% in capital value and returning 23.6% including dividend income (24.7% counting the value of imputation credits).
Australian shares have also had a good year. The S&P / ASX200 Index has made a 19.4% capital gain and, including dividends, has returned 24.2%. As in New Zealand, the gains came earlier on, and shares have not made much net progress since the end of July.
International Fixed Interest
Bonds have done well over the past year, but the outlook for further good performance is more challenging.
International Equities
World shares have, ultimately, had a strong year. It took a long time for shares to recover from the brutal sell-off of late 2018, but the MSCI World Index finally got back to its pre-sell-off levels in early November, and prices have continued to improve since then.
The cut-off date for performance data in this update is Dec. 13, and at that point the MSCI World index of developed markets was up 23.1% for the year in U.S. dollars (25.5% including taxed dividends). Local investors also enjoyed a small forex gain, with the kiwi dollar depreciating by 1.6% against the U.S. dollar.
Among the major markets, the U.S. has been strongest: the tech-oriented Nasdaq Index is up 31.6%, and the S&P 500 is up 26.4%. But most of the big bourses have also done well, with the DAX Index in Germany, for example, up 25.8% and Japan’s Nikkei Index up 20.0%. The back marker has been the U.K., where the FTSE 100 is up only 9.3%; even after a strong postelection rally, it is still well adrift of its all-time high back in mid-2018.
Emerging markets have done reasonably well, but a series of single-country setbacks meant that investors have been relatively wary of the asset class. The MSCI Emerging Markets Index is up 12.6% in U.S. dollars and the Brazil, Russia, India, and China—or BRIC— economies are up 16.5%.
The consensus outlook has been that the world economy could be set for a modestly better 2020, if many of the assorted downside risks do not materialise, and that global equities continue to surf the wave of the long post-global financial crisis business cycle.
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