Selected Market Indicators for Periods Ended 29 February 2020

After touching new highs earlier in the year, global equities and other risk assets sold off sharply in February over concerns about the spread of coronavirus. While the reported cases in China started to tail off, hot spots sprung up in Iran, South Korea and Italy, with the latter enduring a slew of outbreaks in the northern province of Lombardy. While efforts to contain the spread of the virus have had a material impact on Chinese growth, a lack of ability to predict the true extent of potential economic damage from the virus remains a key driver of investor trepidation; ripple effects were felt throughout the rest of the world as uncertainty as to the timeline of an economic recovery was called into question.
 
Developed Market Equities around the world suffered over February, with the MSCI World Index down -8.1% (-4.5% in unhedged NZ dollars), while the S&P 500 slipped into correction territory, down 13% from its February high. New Zealand Equities felt the sting of predicted impacts on global trade, down -3.9%, while Australian Equities (-7.7%) lost considerable value. Global Listed Property (-8.1%) and Infrastructure (-8.5%) suffered the same fate as equities. NZ (+1.2%) and Global Bonds (+1.2%) edged up as investors fled growth assets.
 
An estimate of the Balanced Fund gross index return based on selected market indicators for February is -2.4%.
 
Significant developments include:
 

• Coronavirus infections pushed to nearly 80,000 at month-end, with the most notable development being a spike in cases outside of China. A short-term disruption to global supply chains, in which virus-depressed earnings were expected to rebound in Q2, looked increasingly unlikely as the month progressed.
• The US Federal Reserve surprised markets on March 3, with a 0.5% ‘emergency’ cut to the Federal Funds rate, taking it to 1.0% - 1.25%. The US 10-year Treasury yield fell below 1.0% on the news – a historic low. Markets reacted negatively to the news, implying market skepticism for the genuine effectiveness of monetary policy in the current environment.
• The Reserve Bank of Australia cut rates to a historic 0.5% on March 2, to another record low; co-ordinated monetary and fiscal measures have been called for, with central banks in the US, Japan and the UK stating they will take all required steps to protect financial stability.

 
Trans-Tasman Equities
 
Despite New Zealand’s distance from coronavirus hotspots, the effects on local logging, agricultural and tourism sectors have weighed on the domestic economy. The NZ share market was down (-3.9%) over the month, outperforming its Australian counterpart (-7.7%), which suffered from downward pressures on bank net interest margins and falling commodity prices.
 
Global Equities
 
Global equities faltered over February on the back of downward revisions in global GDP growth. Developed (-8.1%) and Emerging (-3.8%) Markets were both affected, with the latter holding up better due to concerted monetary and fiscal stimulus efforts in China. Developed Equities struggled, with an increase in ex-China global infections weighing on investor sentiment.
 
Property and Infrastructure
 
Global Listed Property (-8.1%) and Global Listed Infrastructure (-8.5%) both lost value over February. Both sectors struggled in the risk-off environment, with a widespread investor shift towards defensive assets adversely affecting the higher-growth characteristics of real assets.
 
NZ Bonds and Cash
 
NZ composite bonds (+1.2%) benefited from the flight to safety as yields fell further and financial conditions tightened. Credit spreads widened over the month, while the NZ 10-year bond yield ended February sharply lower at 1.06%.
 
Global Bonds
 
Bonds rallied over the month in the risk-off enviroment. Indices across the board posted stong returns while yield curves flattened, with Global Aggregate Bonds ending the month up +1.2%. The US 10- year yield shifted abruptly lower, while total negative yielding debt rose from 20% to 25% year-to-date.
 
Currency
 
The New Zealand dollar weakened against the majority of its global counterparts throughout February as investors favoured defensive currencies. The largest movements were felt against the yen, US Dollar, and euro, while the US Dollar moved notably higher against the British pound, Australian dollar, and emerging market currencies. The yen remained strong.