Selected market indicators for period ended 31 August 2016

09/09/2016
 Provided by Mercer.
Global equity markets treaded water in August as volatility declined and trading volumes fell.

The Bank of England (BoE) followed market expectations by cutting rates and launching a stimulus package in the aftermath of the Brexit vote. In contrast, the Bank of Japan (BoJ), delayed any new monetary policy action. In the US, speculation over higher yields rose after the Federal Reserve Chair commented at the annual economic policy symposium in Jackson Hole that the case for interest rate hikes had strengthened in recent months.

The MSCI World Index rose +0.4% (in local currency) during August. Unhedged investors received a return of -0.5%, with the NZD rising against all major currencies. Locally, NZ Shares rose +0.7% while NZ Government Bonds returned +0.2%. Global Aggregate Bonds finished the month up +0.1%. Global Listed Property and Global Listed Infrastructure both declined, returning -2.1% and -2.4% respectively.

An estimate of a Balanced Fund gross index return based on selected market indicators for August is +0.1%.

Significant recent items include:
  • In Europe, markets face headwinds over persistent growth concerns, despite the ECB’s substantial stimulus efforts and a negative interest rate policy. In the aftermath of Brexit, the BoE cut its GDP growth forecast to 0.8% from 2.3% for 2017, and to 1.8% from 2.3% for 2018.
  • Along with the BoE, the Reserve Bank of New Zealand and the Reserve Bank of Australia cut interest rates in August. The three central banks each cut rates by 0.25%, bringing down their respective cash rates to 0.25%, 2.0% and 1.5%.
  • Following Dilma Rousseff’s replacement by Michel Temer as Brazilian President, local shares (MSCI Brazil) have posted a very impressive rebound of 32% in 2016 (local currency), while the Real has surged 23% against the US dollar.
  • In Japan, equity markets moved higher at the end of August, recovering earlier losses following expectations that the BoJ would have to take additional easing measures to meet the Bank’s inflation target of 2%.

Trans-Tasman Equities

NZ Equities held on to the gains made in July, returning a modest +0.7% in August, as markets factored in the increased possibility of the US Fed raising rates in September. NZ Equities remain miles ahead of their Australian counterparts, returning +32.4% over the past year. Across the Tasman, the Australian market fell -1.6%, impacted by the decline in commodity prices.

Global Equities

Global Equities inched higher in August as the MSCI World Index returned +0.4%, reflecting mixed economic news. The NZ dollar appreciated over the month, detracting from unhedged returns (-0.5%). While Europe, the UK and Japan were all up over 1%, the US was barely positive at +0.1%. Emerging Markets Equities gained +2.6% for the month, surpassing all major developed regions.

Property and Infrastructure

Global Listed Property (hedged) and Listed Infrastructure (hedged) declined over the month, returning -2.1% and -2.4% respectively. Global Listed Infrastructure experienced its first monthly decline for the year, affected by the ongoing decline in commodities, down -1.6% in August. However, both sectors continue to outperform the broader equity market over the year, up +18.4% and +9.5% respectively.

NZ Bonds and Cash

NZ Government Bonds (+0.2%) and NZ Corporate Bonds (+0.5%) both generated positive returns in August. As widely expected by the market, the RBNZ cut the Official Cash Rate by a further 0.25% in early August, taking the cash rate to a new record low of 2.0%. The RBNZ also indicated the likelihood of further policy easing. Markets expect another cut in November.

Global Bonds

Global Bond markets were flat in August, up just +0.1%. US Treasury rates moved marginally higher, while rates for Japanese, Swiss and German government bonds moved further into negative territory. The Fed prepared markets for potential rate hikes at the Jackson Hole symposium, while most other global central banks maintained an exceptionally accommodative monetary policy view.

Currency

The NZ dollar strengthened 1.9% on a TWI basis in August, despite the rate cut during the early part of the month. The NZ dollar appreciated against all major currencies, with the strongest gains against the GBP (+2.0%), AUD (+1.7%) and JPY (+1.5%). Despite further indications of a US Fed rate hike before the end of the year, rate cuts by the RBA and the BoE helped maintain the attractiveness of the NZ dollar for overseas investors.

 

 

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