Selected market indicators for period ended 30 June 2017

 Provided by Mercer.
Global equity markets trended sideways in June as investors displayed some caution in response to rising US interest rates and political machinations across Europe (including the UK election results).
Business sentiment remained mildly positive as year over year inflation and PMI indexes (which measure the health of a country’s manufacturing sector) rose across the world’s larger economies. Bond markets reversed recent gains as upward pressure on interest rates put downward pressure on bond prices.

The MSCI World Index closed out the month flat (in local currency terms). Unhedged investors received a return of -2.7%, hurt by a strengthening NZ dollar, which appreciated +3.2% against the US dollar. NZ Shares outperformed developed markets, returning +2.7%, while NZ Government Bonds fell -0.7% over the month. Global Aggregate and Government Bonds also fell, returning -0.2% and -0.3% respectively. Global Listed Property outperformed the broader equity market, up +0.5%, while Global Listed Infrastructure underperformed, falling -1.1%.

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

Significant recent items include:
  • Moody’s (credit rating agency) downgraded the credit rating of Australia’s “Big Four” banks (ANZ Banking Group, Commonwealth Bank, National Australia Bank and Westpac) to Aa3 – three grades below the highest rating of Aaa - from Aa2, citing “elevated risks” in the household sector. This could lead to higher funding costs for their NZ subsidiaries (ANZ, ASB, BNZ and Westpac).
  • New Zealand business confidence climbed to a nine month high as sentiment improved. The RBNZ left the Official Cash Rate (OCR) unchanged at 1.75% at its June meeting and indicated that monetary policy will remain accommodative for a considerable period.
  • The US Federal Reserve (responsible for setting monetary policy in the US) raised the target rate by 25 basis points (0.25%) to 1.25%. The announcement was well anticipated and priced-in by the market. “The Fed” also confirmed that balance sheet normalisation (the reverse of Quantitative Easing) will commence later this year.
  • US economic growth (measured by gross domestic product or “GDP”) for Q1’2017 was revised up for a second time in June. Improved consumer spending was the main driver of the latest revision, which raised the annual rate to 1.4%, compared to the April, was 0.7%.
Trans-Tasman Equities
NZ equities delivered a strong return of +2.7% for the month of June, supported by the Consumer Staples (+9.5%), Utilities (+2.0%) and Real Estate (+1.3%) sectors. Across the Tasman, the ASX 200 delivered a modest return of +0.2%, reflecting relatively weak economic data releases (although generally in line with expectations) and a lukewarm domestic economic outlook.

Global Equities
The MSCI World index was flat overall for June (in local currency), but this masked contrasting regional and sector fortunes. Japan rose +2.7%, while Europe and the UK (last month’s best performers) fell
-2.3% and -2.5% respectively. Financial stocks rose +4%, while Technology stocks, up 33% in the 12 months to May, fell -2.3%. Emerging Markets posted another positive return in June, up +1.6%.

Property and Infrastructure
Global Listed Property rose +0.5% over the month, despite interest rates rising in the last two weeks of the month (which typically makes the sector less attractive to investors). Global Listed Infrastructure fell by -1.1% in June, the first negative month since last November. Both sectors lag the broader global equities market over the last 12 months.

NZ Bonds and Cash
NZ Government (-0.7%) and Corporate Bonds (-0.2%) both delivered negative returns in June. The 10 year NZ government bond yield increased over the month, closing at 3.0% (rising yields generally lead to lower returns from existing bonds with lower coupons and vice versa). The Cash return remains low, but is now ahead of NZ and Global Bonds over the last 12 months.

Global Bonds
Global Bond markets also finished June in negative territory. Global Aggregate and Sovereign bonds returned -0.2% and -0.3% respectively. The interest rate rise in the US lead to higher yields in the latter half of June, driving prices down. Global Credit performed better, returning +0.1%, as the difference between yields on corporate and government bonds continued to narrow, driving up credit prices.

The NZ dollar strengthened in June. The largest rise was against the Japanese yen (+4.8%). The +3.2% gain against the US dollar and +2.5% gain against the British pound reflected optimism in the domestic economy. 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 +2.0%.


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