Selected market indicators for period ended 31 May 2018

Global equities, in aggregate, rose over May, but it wasn’t all good news.

Strong returns in the US and UK were partly offset by falls in Europe, Japan and Emerging Markets. Market sentiment improved mid-month following a joint statement from the US and China confirming that no new tariffs would be imposed against each other. However, fast forward to month end and the US announced further tariffs, not only on Chinese, but Canadian, European and Mexican goods as well. Understandably, the market reacted negatively, not helped by political instability in Italy.

The MSCI World Index returned +1.3% (in local terms) in May; unhedged investors gained +1.0% over the month. The NZX50 returned +2.6%, well ahead of global and Australian (+1.1% in local terms) equities. Defensive sectors benefited from the late fall in bond yields, with Global Aggregate and NZ Government Bonds returning +0.4% and +0.7% respectively, while Global Listed Property rose +2.2%. In contrast, Global Listed Infrastructure returns were near zero. Commodities continued their recent run of good form, up +1.4%, despite oil prices falling off highs.

An estimate of a Balanced Fund gross index return based on selected market indicators for May is +1.1%.

Significant recent items include:
 

• The US announced a 25% tariff on US$50bn of Chinese goods, along with tariffs on steel and aluminium imports from Canada, Mexico and the European Union; representatives from the latter were quick to retaliate with counterbalancing measures of their own.
• Italian political unrest and market positioning saw a capitulation in rates around the world late in the month; the US and UK 10 year bond yields dropped 0.16% and 0.13% as the Italian 2 year bond yield spiked from 1% to 2.77% and the 10 year from 2.69% to 3.16%.
• Kim Jong-Un continued his recent spate of meetings with neighbouring heads of state, holding further talks with China’s “paramount leader”, Xi Jinping, and South Korean President, Moon Jae-in, during May.
• President of Argentina, Mauricio Macri, announced talks with the International Monetary Fund on financial support for the country's economy; the Central Bank of Argentina interest rate is now 40%, inflation is 25% and the value of the Argentine peso is at a record low.

Trans-Tasman Equities

The NZX 50 delivered positive returns in May, up +2.6%. Synlait Milk (+12.5%) was the top performer for the month, while a2 Milk (-10.5%) had its worst month in more than 3 years. Australian shares underperformed New Zealand over the month, returning +1.1%. The ASX200 has returned +9.6% over the last 12 months, compared to +18.1% for the NZX50 Index.
   
Global Equities

Global equity markets returned +1.3% in May after being up as much as 3.1% mid-month; the US U-turn on trade tariffs with China and other trade partners, coupled with political instability in the Eurozone, sparking a sell-off in equity markets late in the month. The IT sector led the way in May, up 6.5%.  Emerging markets lagged their developed counterparts over the month, falling -2.2%.

Property and Infrastructure

Global Listed Property continued to deliver strong returns, rising +2.2% for the month on the back of increased inflation expectations and a boost from the fall in global bond yields late in the month. Global Listed Infrastructure didn’t fare as well, delivering a near zero return in May (+0.1%).

NZ Bonds and Cash

New Zealand bonds performed well in May, with Government Bonds (+0.7%), just ahead of Corporate Bonds (+0.6%). Over a 12 month period NZ Government Bonds have underperformed Corporate Bonds by +0.9%. Cash continues to deliver modest returns and lag most other asset classes over 12 months.

Global Bonds
As noted above, political instability in Italy, which invoked fears that Italy may look to exit the Eurozone, lead to significant volatility in bond yields late in May. The US 10-year bond yield fell back to 2.86% at month end after peaking at 3.11% on 17 May. The fall in yields helped Global Government Bonds to deliver a positive return for the month, up +0.2%, while Global Aggregate Bonds returned +0.4%.  

Currency
NZ dollar weakened against a number of major currencies during the month, but strengthened against the British pound and Euro (both +3.1%). The NZ dollar lost the most ground against the Japanese Yen, falling by -1.1% over the month. The trade-weighted index (TWI) fell by -0.5% over the month, ending at 73.4.