Selected market indicators for period ended 31 May 2017

 Provided by Mercer. 
Global equity and bond markets marched onwards and upwards in May despite continued geopolitical uncertainty.

While economic growth moderated in the US and China, economic data from the Eurozone and Japan surprised on the upside, providing a boost to the regions’ share markets. At the same time, core inflation across the globe remains low, delaying expectations of further interest rate normalization and providing support for bond prices.

The MSCI World Index rose +1.5% (in local currency) during May. Unhedged investors received a return of -1.2%, hurt by a strengthening NZ dollar which appreciated +3.4% against the US dollar. Local markets were up, with NZ Shares and Government Bonds returning +0.6% and +1.3% respectively over the month. Global Aggregate Bonds and Global Government Bonds also rose, up +0.7% and +0.6% respectively. Global Listed Property (+0.5%) was also positive while Global Listed Infrastructure (+2.9%) outperformed the broader global equity market.

An estimate of a Balanced Fund gross index return based on selected market indicators for May is +0.5%.

Significant recent items include:
  • The US withdrew from the Paris Climate Accord, which seeks to reduce carbon emissions and slow the effects of climate change. The unconventional move has brought criticism from major European nations and threatens to further weaken political and economic alliances with the US. This could have implications for companies that derive revenues from global trade.
  • US GDP (a measure of economic growth) for the March 2017 quarter was revised in May, up to 1.2% for the quarter, from 0.7%. The first quarter earnings season also ended strongly with the highest year over year growth since Q3 2011. This was positive for US equities.
  • OPEC extended its cut in oil production by another 9 months until March 2018. Reducing the oil supply would typically result in higher prices. However, prices dropped on the news, signaling that investors may have expected a longer extension than announced.
  • Markets welcomed the outcome of the French presidential election with the centrist (pro-European) candidate, Emmanuel Macron, winning against populist candidate, Marine Le Pen. However, political risks remain elevated with the UK Prime Minister, Theresa May, calling for an early general election on 8 June, hoping to strengthen the Brexit negotiating position.
Trans-Tasman Equities
NZ equities delivered a modest positive return of +0.6% for the month of May, supported by increasing dairy prices, steady retail sales growth and declining unemployment. Across the Tasman, the ASX 200 fell -2.8%, reflecting the pessimistic consensus on the upcoming Australia GDP announcement for Q1.

Global Equities
Global equity markets moved higher in May, led by European, Asian and Emerging Markets. The MSCI World Index rose +1.5% in local currency terms. The outcome of the French election was generally positive for markets across Europe, supporting trade and economic co-operation across the region. The UK market was particularly strong, rising 4.8% over the month.

Property and Infrastructure
Both Global Listed Property and Global Listed Infrastructure delivered positive returns. The Global Property market benefitted from the decline of long term bond yields (making existing yields more attractive and pushing up prices). Global Listed Infrastructure continues to perform strongly on the expectation of increased infrastructure spending across many developed markets.

NZ Bonds and Cash
NZ Government and Corporate Bonds both delivered positive returns in May, up +1.3% and +1.0% respectively. The yield curve flattened during the month as the 10yr government bond yield continued to drop, closing at 2.8% (falling yields generally lead to higher returns from existing bonds with higher coupons). The Cash return remains low and continues to lag most other asset classes over 12 months.

Global Bonds
Global Bond markets finished May with performing strongly, reflecting weak inflation reports and contracting credit spreads (the difference between yields on corporate bonds and government bonds). Global Aggregate and Sovereign bonds returned +0.7% and +0.6% respectively. Most developed markets continue to maintain low interest rates in the hopes of boosting economic activity.

The NZ dollar strengthened against all major currencies in May after falling over the past 3 months. The largest rise was against the Australian dollar (+3.9%), while the NZ dollar closed out May back above US70c (up +3.4% for the month). The strong NZ dollar reduced returns for unhedged investors who are exposed to fluctuations in the value of foreign currencies. On a trade-weighted basis, the NZ dollar rose +2.7%.

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