Selected market indicators for period ended 31 October 2018
October 2018 is being called “the worst month in ten years” after many major global sharemarkets had much of their year to date gains annihilated by another large bout of volatility.
While the exact cause is unclear, continued US economic strength, coupled with comments from the US Federal Reserve Chairman that US interest rates are still “a long way from neutral” are being blamed for triggering the equity sell-off. This was further fuelled by signs of economic slowdown in China, political uncertainty around US mid-term elections and global trade tensions.
The MSCI World Index, representing developed equity markets, was down a whopping -6.8% in local currency terms. The unhedged return was softened by a decline in the NZ dollar, down -5.9%. The NZ market didn’t fare much better than global markets, closing the month down -6.3%. Global aggregate bonds returned -0.2% as global government bonds (-0.0%) outperformed global credit (-0.9%). Listed property and listed infrastructure markets also lost value, sliding -3.2% and -1.1% respectively, although both were well ahead of the broader global market.
An estimate of a Balanced Fund gross index return based on selected market indicators for October is -3.0%.
Noteworthy developments include:
- The US mid-term elections are taking place on November 6 2018. If the Republicans lose control of the Congress or Senate during this election, several planned policies of the Trump Administration may be vetoed by the Democrats.
- Although there was progress on the United States-Mexico-Canada Agreement (USMCA), trade friction between the US and China remains as problematic as ever, with Chinese President, Xi Jinping, giving no indication that China is in a hurry to sign an agreement with the US.
- Oil Prices peaked and slumped during October. Oil prices rose to a four year high amid rising fears of Iranian oil sanctions, and then just as quickly fell, as investors dumped equities and risk-oriented assets like oil.
- The NZX (New Zealand Stock Exchange) has updated its listing rules in a bid to attract new listings and expand the relatively underdeveloped and illiquid (compared to other developed nations) New Zealand sharemarket.
Caught in the cross fires of global market volatility the NZX50 Index closed down -6.3% for the month. Only three companies listed on the NZX50 managed to deliver positive returns over the month, with the worst performer (Synlait Milk) returning -20.1%. The ASX200 Index performed broadly in line with the NZ market, falling -6.1% in Australian dollar terms.
Globally, all equity markets struggled in October, with emerging markets (-7.8%) and global small caps (-9.4%) lagging the MSCI World Index (-6.8%). Despite the magnitude of the falls, the VIX Index (a measure of expected future volatility) remained well short of the highs reached in February. All major developed markets, except the US, now have negative year to date returns (all returns in local currency terms).
Property and Infrastructure
Global listed property lost ground over the month, falling -3.2%, while global listed infrastructure took less of a hit, down -1.1%. Commodities dropped -2.2% over the month, driven in part by a drop in the price of US Crude Oil, which plunged from a high of US$76.41 per barrel to US$65.32 by the end of the month (all returns NZ dollar hedged).
NZ Bonds and Cash
New Zealand bonds (+0.4%) and cash (+0.2%) were the only asset classes to post positive returns in October, the former supported by low interest rates that look set to persist throughout 2019. Over the 12 months to 31 October, only NZ shares (+8.6%) are ahead of NZ bonds (+4.8%).
Global bond markets lost ground during October, falling -0.2% as rising interest rate expectations weighed on bond prices; government bonds (-0.0%) fell less than corporate bonds (-0.9%) in the risk-off environment. The US 10 year bond yield has stayed above 3% since mid-September, supported by the rate increase from the US Fed in late September, closing out October at 3.14%.
The NZ dollar fared relatively well over the month, rising against the Australian dollar (+0.6%), the British pound (+0.5%), and the euro (+1.0%). The NZ dollar fell against the Japanese yen (-2.1%) and the USD (-1.5%) as these currencies are typically seen as safe havens during times of volatility. Over the month the NZ dollar gained +0.4% on a trade-weighted basis.
12 Oct 2018