Selected market indicators for period ended 31 October 2016

16/11/2016
Provided by Mercer.
Equity and bond markets both finished lower in October as risk aversion took hold ahead of the upcoming US election and potential monetary policy changes.

There is a growing concern that the impact of monetary policy may be waning. The re-opening of the FBI’s e-mail investigation against Hillary Clinton at month end sharply narrowed her lead over Republican candidate, Donald Trump. In a year that has given us Brexit and Iceland’s Pirate Party, nothing will be certain until all the votes are counted – or recounted!

The MSCI World Index declined -0.7% (in local currency) during October. Unhedged investors received a return of -0.3%, with the NZD falling against the US dollar and Australian dollar. Locally, NZ Shares underperformed other developed markets, falling -5.7%, while NZ Government Bonds fell -1.3%. Global Aggregate Bonds finished the month down -0.9%. Global Listed Property and Infrastructure also declined during the month, returning -4.4% and -0.9% respectively.

An estimate of a Balanced Fund gross index return based on selected market indicators for October is -1.5%.

Significant recent items include:
 
  • A timeline for the UK triggering article 50 was announced over the month. Prime Minister, Theresa May, indicated the government was prepared to pursue a “hard Brexit” and will start the formal proceedings before the end of March 2017. However, the saga took another turn as the High Court ruled that parliament must vote on the exit. The government is appealing the ruling.
  • The European Central Bank (ECB) kept monetary policy unchanged. ECB President, Mario Draghi, suggested that the Bank would decide in December whether or not to extend its €80 billion quantitative easing program beyond the current deadline of March 2017..
  • US third quarter GDP grew by +2.9% on an annual basis, the fastest quarterly growth rate in the past two years, making an interest rate rise there even more likely.
  • Oil prices surged to a 12-month high of more than $53/bbl mid-month before dropping sharply following the news that OPEC and non-member producers reached an impasse on terms surrounding proposed production cuts. The price at month-end was $46.80/bbl.
  • Statistics NZ owned up to an error that has seen inflation over the last year double (from previously reported numbers) to 0.4%. The corrected returns are reflected in the table overleaf.
     

Trans-Tasman Equities

October was a tough month for Australasian equities. With close to 50% of the NZX held by offshore investments, the market suffered from a net outflow as overseas investors positioned themselves for the anticipated OCR reduction and Federal interest rate hike in the US. NZ shares fell -5.7%. Across the Tasman the ASX200 Index returned -2.1%, despite a positive industrial metals sector.

Global Equities

After two consecutive months of modest returns, the MSCI World declined -0.7% in local currency terms. Questions continue to build around the ability of monetary policy to support current valuations in the face of low global growth forecasts. Japan was the only major market to provide significant gains, returning +5.1%, as its currency weakened. Emerging Market shares continued their good run.

Property and Infrastructure

Similar to NZ equities, Global Listed Property (hedged) suffered over the month, down -4.4% as investors reacted to rising bond yields across major economies. Global Listed Infrastructure was less affected, but still down --0.9%. Commodities also ended the month in negative territory, down -1.5%, largely due to weak performance from the energy component.

NZ Bonds and Cash

NZ Government Bonds declined -1.3% while NZ Corporate Bonds fell -0.6% in October. The local bond market was widely affected by global factors. Some commentators are now starting to question whether or not the RBNZ should cut rates in November, as expected. The economy continues to grow and unemployment has just fallen to 4.9%, its lowest level since December 2008.

Global Bonds

October was a weaker month for global bond markets with inflation expectations integral to a number of market developments. Asset classes with higher interest rate sensitivity were especially vulnerable. Government bond yields were sharply higher (prices lower) overall. Investment grade corporate bond prices also fell (but not by as much), while high yield credit was generally more resilient.

Currency

The NZ dollar fell against the US dollar and Australian dollar, while appreciating +4.7% against the British pound. In recent months the kiwi has benefited from a strong economic outlook and a recovery in the dairy price, while major central banks maintained their near-zero interest rate policies. However, the prospect of further cuts by the RBNZ (and likelihood of a US rate hike) before year end could put some downward pressure on the NZ currency.

 

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