Selected market indicators for period ended 31 January 2018
The first month of 2018 picked up where 2017 left off, with most global equity markets (Australia and the UK aside) delivering positive returns.
Global growth, now at its fastest pace since the financial crisis, continues to support growing share prices. In contrast, upward pressure on global yields, driven by interest rate hikes and less accommodative monetary policies, contributed to negative returns from bond markets and other yield-sensitive sectors such as property and infrastructure over the month.
The MSCI World Index performed well, up +3.8% (in local currency terms). The NZ dollar strengthened against most major currencies, leading to a lower return (+1.2%) for unhedged NZ investors. NZ equities underperformed most other developed markets, returning +0.5%, as high-yielding stock markets were out of favour. Rising bond yields led to negative returns from NZ (-0.5%) and Global Government (-0.6%) Bonds, and also contributed to negative returns from Global Listed Property (-1.3%) and Infrastructure (-1.2%) over the month.
An estimate of a Balanced Fund gross index return based on selected market indicators for January is +0.6%.
Significant recent items include:
- China remains the engine room of global growth, growing 6.9% in 2017; the first annual acceleration for the economy since 2010.
- The first anniversary of the inauguration of US President Donald Trump was marked by a government shutdown, after a failure to pass legislation to fund government operations. The tax cuts enacted last year look set to put further pressure on the US debt ceiling in 2018.
- Both the Bank of Japan and the European Central Bank maintained their respective monetary policies. Interest rates were left unchanged along with asset purchase programs. Most economic data in Europe indicates the economy is continuing to strengthen.
- Coalition negotiations in Germany continued throughout January with a deal still outstanding at month end. The outcome could be crucial to political stability across Europe, with Italian and Russian Elections on the horizon (4 March and 18 March respectively).
- NZ inflation (CPI) came in under expectations in Q4, up just 0.1%, as a range of food and retail prices fell over the December quarter. The annual increase for 2017 was 1.6%, led by construction (+5.3%), housing and household utilities (both +3%) and food and rent (+2.3%).
The New Zealand share market underperformed developed markets in January, returning +0.5%. The Australian market also struggled, falling -0.4% over the month. Higher yielding markets such as NZ and Australia fell out of favour as investors sought higher returns in other markets. Returns for the NZ market over 12 months are now broadly in line with global markets, and still well ahead of Australia.
The MSCI World index (in local currency) had a strong month, returning +3.8%, underpinned by synchronised growth across most markets. Defensive sectors (e.g. Real Estate, Telecommunications, Utilities and Consumer Staples) underperformed as continued low volatility and higher interest rates made riskier assets more attractive. Emerging markets (+6.8%) upstaged developed markets again.
Property and Infrastructure
Both Global Listed Property and Global Listed Infrastructure lost value in January, -1.3% and -1.2% respectively. Increasing interest rates weighed on both sectors over the month. The two sectors continue to trail the broader global equity market over the last 12 months but have still produced positive returns, +7.6% and +13.5% respectively.
NZ Bonds and Cash
New Zealand Bonds had a weak start to the year. The NZ 10 year bond yield followed US yields higher over the month, ending January at 2.93% (up 0.18%). This put downward pressure on bond prices and led to a negative return from NZ Government Bonds (-0.5%). NZ Corporate Bonds (+0.1%) outperformed Government Bonds, but both markets underperformed Cash (+0.2%) over the month.
Global Bond markets performed worse than local markets with both Global Aggregate Bonds and Global Sovereign Bonds returning -0.6% over the month following rising inflation expectations. Corporate Bonds also fell -0.6%. The 10 year US Treasury Bill yield finished the month at 2.72%, up more than 0.3% from the end of 2017.
The NZ dollar rose against most major currencies over the month, with the British pound the only exception. The strongest rise over the month was against the US dollar (+4.1%) which weakened considerably following US Treasury Secretary, Steven Mnuchin’s comments at the World Economic Forum in Davos, Switzerland, indicating that a weak US dollar was a boost to US trade. On a trade-weighted basis, the NZ dollar gained +0.9% over the month, but is still down -5.9% over the year.
6 March 2018