Selected market indicators for period ended 30 September 2018

Global equity investors struggled with the uncertainty of ever more ubiquitous trade tensions over the month, although markets still delivered a small positive return in aggregate.

The Trump-initiated negotiations, designed to improve trade conditions for the US, moved in his favour during September; South Korea made trade concessions to the US and agreement was reached with Canada and Mexico on a new tri-lateral trade agreement. Global bonds prices fell, as rising optimism over the strength of the US economy raised expectations of further Fed rate rises.

The MSCI World Index, representing developed equity markets, was up +0.7% in local currency terms (the unhedged Index rose +0.6%). The NZ market kept pace with its offshore counterparts, returning +0.7% for the month. Global aggregate bonds fell (-0.4%) with global government bonds (-0.5%) losing more ground than global corporate bonds (-0.3%). The interest rate sensitive global listed infrastructure (-0.5%) and property (-1.8%) sectors both declined over the month. In contrast, commodities rose +1.9%, benefiting from the rising oil price over the month.

An estimate of a Balanced Fund gross index return based on selected market indicators for September is +0.3%.

Noteworthy developments include:
 

• In line with market expectations, the US Federal Reserve increased its official rate target range in late September to 2.0% - 2.25%.
• The US, Canada and Mexico reached agreement on the United States-Mexico-Canada Agreement (USMCA), Trump’s replacement for the North American Free Trade Agreement (NAFTA) in September; although the deal still needs to be ratified by all three governments.
• Oil prices rocketed up throughout September, with US Crude Oil ending the month at over US$73 per barrel. Prices were supported by an OPEC decision to limit further increases in production, despite Trump demanding a price reduction.
• The RBNZ kept the official cash rate (OCR) on hold at 1.75% in its September meeting, stating “While GDP growth in the June quarter was stronger than we had anticipated, downside risks to the growth outlook remain.”
• Turkey’s central bank raised its official interest rate in mid-September, from 17.75% up to 24%. The move was made in an attempt to reverse the heavy decline in the Turkish lira and loss of investor confidence in Turkey.

Trans-Tasman Equities

Backed by a strong June quarter GDP release, the NZX 50 Index maintained pace with the majority of developed markets in September, returning +0.7%. Australian shares fell -1.3% (in local currency terms) over the month, weighed down by the banking sector as investors expected a negative outcome from the release of the Royal Commission’s interim report.

Global Equities

Developed global equity markets returned +0.7% (in local currency terms) in September, led by gains in Japanese stocks (+5.5%). UK stocks also delivered a solid return over the month, recovering from recent Brexit jitters to return +1.4%. Investor confidence continues to wane in Emerging Markets, which fell a further -1.2% (all returns in local currency terms).

Property and Infrastructure

Global listed property (NZ dollar hedged) lost ground over the month, falling -1.8%, while global listed infrastructure (NZ dollar hedged) took less of a hit, down -0.5%. Both sectors, which predominantly deliver returns through yields, were negatively affected by the US Fed Funds rate rise and accompanying fall in investor sentiment.

NZ Bonds and Cash

New Zealand bond returns were muted in September, with government bonds down (-0.2%) and corporate bonds flat. The 10 year NZ government bond yield ended the month at 2.65%, up 0.11%. The RBNZ reiterated its position in its September announcement, indicating that there is likely to be no change in the OCR through to 2020.

Global Bonds

Global bond markets lost ground during September, falling -0.4%. Government bonds (-0.5%) fell further than corporate bonds (-0.3%) as credit spreads continued to tighten.  Although bond prices felt the negative effect of the anticipated US Fed rate hike late in the month, some comfort was taken from the indication that the pace of future rate hikes could be slower than many expected.

Currency

In aggregate, the NZ dollar remained fairly stagnant over the month, with its only material movements against the Japanese yen (+2.4%) and the British pound (-0.4%). The NZ dollar was valued at just over 0.66 US dollars at month end. The trade-weighted index (TWI) finished the month where it started, remaining at 72.1.