Selected market indicators for period ended 31 July 2016

10/08/2016
 Provided by Mercer.
Confidence returned to Global markets in July as investors put aside worries related to the surprise Brexit result in June.

Equity markets rebounded, delivering strong returns for the month across all developed countries. Financials, Information Technology and Consumer Discretionary were the standout sectors, whereas sectors that did well last quarter, Energy and Telecoms in particular, generally lagged. Notwithstanding the risk-on mode, investor appetite for safe haven investments remained, pushing interest rates around the world to new lows (pushing up bond prices); 74% of developed market government bonds now have yields below 1%, with 35% in negative territory.

The MSCI World Index rose +4.1% during the month (in local currency), making back ground lost in June and boosting the year-to-date return back into the black at +3.4%.  Unhedged investors received a return of +2.9%, with the NZD rising against most currencies. Locally, the NZX was up +6.5%, finishing at yet another all-time high. Across the ditch, Australian shares had their largest monthly increase since October 2011 (+6.3% in AUD).  Global Aggregate Bonds returned +0.8% for the month. NZ Government Bonds rose +0.9%. Global Listed Property and Global Listed Infrastructure returned +5.0% and +2.0% respectively (both NZD hedged).

An estimate of a Balanced Fund gross index return based on selected market indicators for July is +2.3%.

Significant recent items include:
  • Oil prices fell to 3 month lows, impacted by global excess supply (high inventories) and lower demand due to slower economic growth.
  • The Australian election resulted in a victory (by a narrow margin) to the Liberal/National coalition and provided a boost to their sharemarket.
  • The Reserve Bank of New Zealand announced further loan-to-value restrictions to mitigate risks arising from the heated housing market. The RBNZ also signalled the need for further rate cuts in its July economic update due to the strong NZ dollar and weak inflation outlook.
  • The Bank of Japan kept its policy rate and bond purchase program unchanged, disappointing markets that were anticipating more stimulus.
  • US job data exceeded market expectations, adding 287,000 new jobs in June (107k more than expected), a positive sign that the US economy is growing. Despite this, the US Fed left rates unchanged, noting that inflation is “expected to remain low in the near term”.

Trans-Tasman Equities

July was a strong month for both NZ and Australian shares, with the NZX 50 reaching an all-time high and the ASX 200 posting its largest monthly increase in almost 5 years. The NZX 50 has been a standout performer over the past year, returning 25.6%, driven by low interest rates, high dividends and a strong economy. The Liberal/National coalition victory helped restore Australian investor confidence.

Global Equities

Global equity markets recovered strongly after the Brexit related sell off in June to return +4.1%.  Central Bank support coupled with strong economic data refueled investor confidence. Japan (+6.4%) and Australia (+6.3%) were the top performing markets outside of NZ. Emerging markets also rose, up +3.9%. The NZ dollar appreciated over the month and year, detracting from unhedged returns.
 

Property and Infrastructure

Global Listed Property (hedged) and Listed Infrastructure (hedged) returned +5.0% and +2.0% respectively, benefiting from a decline in yields globally. Both sectors are well ahead of the broader equity market over the year to date. Commodities was one of the few asset classes to fall in July, down -4.9%, with the fall in oil prices a key detractor.
 

NZ Bonds and Cash

The NZ bond market had another strong month, as both Government and Corporate bonds benefited from a fall in yields across all maturities. The largest driver of this return was the longer end of the yield curve, with the NZ 10 year bond yield finishing at 2.21% following the seventh straight monthly decline. RBNZ guidance signaled further cuts to the OCR, pushing down the front end of the yield curve.
 

Global Bonds

Yields initially rose in July, then generally grinded lower towards month end, pushing bond prices up as investors again sought the safety of Government bonds. Credit outperformed Government Bonds, benefiting from the post-Brexit risk rally. The UK 10 year government bond hit a record low, finishing the month at 0.81% on speculation that Brexit will push the Bank Of England to cut interest rates further.
 

Currency

The NZ dollar strengthened during the month against all major currencies (GBP +2.0%, USD +1.3% and EUR +0.6%), with the exception of the AUD (-0.8%). Despite a drop immediately following the RBNZ economic update, the NZ dollar continued to appreciate as 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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