Selected market indicators for period ended 29 February 2016

09/03/2016
 Provided by Mercer.
 February 2016 can be characterised as a month of two halves.

The first half of February continued in the negative note felt in January, as disappointing economic data from the US and Europe drove share markets down further. However, the second half of February saw a rebound as investors re-entered the market following more positive US data, although not with enough vigour to completely offset earlier falls. The seesaw nature of markets reflects the level of uncertainty as investors respond to mixed economic signals and expectations.

The MSCI World Index returned -1.5% (in local currency) in February to be down nearly -10% over the last 12 months. A strengthening NZD reduced the return for unhedged investors to -2.6%.  NZ Shares were up +1.0% over February and remain a standout performer over the last year. Global Aggregate Bonds had a strong month, returning +1.1%, as did NZ Bonds, up +1.3%. Global Listed Property (hedged) declined in February, albeit modestly, returning -0.3%. In contrast, Global Listed Infrastructure (hedged) rose +0.4%.

An estimate of a Balanced Fund gross index return based on selected market indicators for February was 0.0%.

Significant recent items include:
 
  • US: manufacturing data was at its lowest level since October 2012. However, towards the end of the month some positive developments - inflation was higher and GDP growth was revised upwards - leading the market to increase the prospect of more interest rate hikes late 2016.
  • Europe: inflation was revised down and economic confidence and business activity declined. The European Central Bank said that it “will not hesitate to act” if additional measures are needed.
  • Brexit fears: UK Prime Minister, David Cameron, has announced a referendum on whether Britain should remain in the European Union, to be held in June this year, leading to market volatility and weakness in the GB pound.
  • Negative interest rates in Japan: Japan surprised the market near the end of January with the central bank cutting rates into negative territory. The country remains in recession and has indicated it will cut rates further, if necessary, to discourage people from hoarding cash.

Trans-Tasman Equities

NZ equities finished the month up +1% on the back of strong earnings results and an increase in Merger & Acquisition activity, with Diligent and Nuplex receiving takeover offers. In Australia, the resource sector rallied as commodity prices stabilized. However, this was offset by falls in other parts of the market, particularly financials, with the overall market down -1.8% in February and -14% for the year.

Global Equities

Global Equities closed out the month down -1.5% (in local currency), recovering somewhat after being down as much as -7% mid-month. The end of the month recovery was driven in part by a reversal in oil prices, which surged +15% over a potential OPEC agreement to limit production. Emerging markets were flat for the month (+0.1%), despite weakness in China and Brazil, which were sold off the most.

Property and Infrastructure

Reflecting their higher yielding natures, neither Listed Infrastructure nor Listed Property fell as much as the broader equity market.  Infrastructure sectors with links to commodities benefited from commodity prices stabilising over the month, helping the sector to a small positive return in February. Despite strong rental growth, Global Listed Property (hedged) has returned -4.7% over the past year.

NZ Bonds and Cash

Driven by the general risk-off environment globally, NZ bond yields fell over the month (the NZ 10-year Government bond yield falling below 3%), pushing up bond returns. Added to that, low inflation and a cooling in the Auckland housing market has increased the prospect of further cuts to the Official Cash Rate.

Global Bonds

Global Sovereign Bonds continued to benefit from the “flight to safety”, returning +1.4% over the month. Global Aggregate Bonds returned +1.1%, with less interest rate duration in the aggregate index the main driver of the lower return, as credit spreads were relatively unchanged. Strong returns from global bonds also reflect the market’s view that more US rate hikes are far from certain in 2016.

Currency

Despite domestic downward pressure from the weak dairy price and low inflation, the NZ dollar strengthened versus most currencies (except Japan) over the month, reversing some of January’s falls. In recent months the NZ dollar has been pulled by conflicting forces: generally strong economic data has created support, but the prospect of future rate cuts and a flight to safety during periods of global weakness has created downward pressure.

 

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