Selected market indicators for period ended 30 June 2016

12/07/2016
Provided by Mercer.
Global markets ended the first half of 2016 the same way they started: with volatility and uncertainty.

Any semblance of normality was forgotten on 24 June as markets around the world responded to the Brexit vote with a sharp equity selloff, falling currencies and rising bond prices. The outcome, and the impending UK exit from the European Union, reignited political and economic concerns that had been looming large. The lament, however, appeared to be short lived (for now at least), as investors rediscovered their faith in central banks and equity markets rebounded, closing out the month with three straight days of positive returns.

The MSCI World Index declined -1.3% during the month (in local currency), lowering the year-to-date return back into the red at -0.7%. Unhedged investors received a return of -6.1%, with the NZD rising sharply against the GBP (+14.6%), USD (+5.3%) and EUR (+5.5%).  NZ Shares declined -1.9%. Global Aggregate Bonds surged, returning +2.0% for the month. Similarly, NZ Bonds rose +0.9%. Global Listed Property and Global Listed Infrastructure returned +3.1% and +3.4% respectively (both NZD hedged).

An estimate of a Balanced Fund gross index return based on selected market indicators for June is -0.6%.

Significant recent items include:
  • The UK’s referendum on membership of the EU resulted in a victory for the “leave” campaign, sending markets into a temporary tailspin.
  • Following the vote to leave, Brexit sparked a series of events: on the morning of the announcement the UK Prime Minister, David Cameron, resigned, Scotland reignited speculation of a UK breakup, and European leaders started to request the resignation of the EU President.
  • Risk aversion spawned by the Brexit vote pushed yet more bonds into negative yield territory. According to Fitch Ratings, negative yielding debt now totals USD$11.7 trillion, with the majority of this coming from Japan ($7.9 trillion), Germany and France (both at $1 trillion).
  • The Italian banking system deteriorated further during the month as its banks ended June sitting on a combined USD$401 billion of bad debts (25% of Italy’s GDP). Overcoming this obstacle will be largely dependent on negotiations between the Italian government and the Eurozone.

Trans-Tasman Equities

The NZX 50 turned in a negative month for the first time since January, declining -1.9% as the local market absorbed the Brexit decision. The NZX 50 has been a standout performer over the past year returning 21.9%, driven by low interest rates, high dividends and surprisingly strong economic data. Across the Tasman, the ASX 200 declined -2.5% awaiting the outcome of the national election.

Global Equities

Global equity markets largely withstood the hurricane of the UK referendum. Despite an immediate selloff, the MSCI World Index (in local currency) declined only -1.3% during the month. Somewhat surprisingly, the UK market rose 5.0%, in part reflecting the strong fall in the pound. Emerging markets also rose, up +1.9%, with the protracted level of uncertainty expected to weaken the US dollar.

Property and Infrastructure

Global Listed Property (hedged) returned +3.1% in June, benefiting from a decline in yields globally. Listed Infrastructure (hedged) returned +3.4%, benefiting from the continued rebound in commodities, in particular energy related companies. Commodities rose by over 4% in June to be up nearly 14% for 2016, but are still down nearly 12% over the last 12 months.

NZ Bonds and Cash

The New Zealand listed debt market provided a positive return as bond prices edged forward during the month. Yields declined throughout the month with the 10 year bond yield finishing the month at 2.34%, the seventh straight month of declines. Following the Brexit vote, markets began to price in further rate cuts this year by the RBNZ.

Global Bonds

Yields continued to decline in June resulting in a positive month for global bonds and pushing annual returns into double digits – in stark contrast to the running yield. Following more uncertainty in Europe, global yields fell. German 10-year bonds reached record lows, joining Japan and Switzerland with yields below zero. The UK 10-year government bond also traded at record lows, ending June at 1.0%.

Currency

The NZ dollar strengthened during the month against all major currencies, with the exception of the JPY (-2.6%). Despite a drop immediately following the Brexit vote, the NZ dollar continued to appreciate during the month as troubles in Europe and our comparatively high interest rates resulted in the NZD remaining attractive. Rising dairy prices supported positive sentiment about the local economy.
 

 

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