Market turbulence follows years of improving returns

16/03/2016
Provided by Mercer.
Investment update from PSS investment manager, Mercer

Since the Global Financial Crisis in 2008/2009, all investment options have benefitted from an improving global economy and strong sharemarket returns. As a result, over the past five scheme years, funds with exposure to growth assets have returned annually, on average, 9.7% for Growth, 8% for Balanced and 5.7% for Stable. This scheme year has been more turbulent as share markets have been up and down. As a result, investment options with a higher exposure to growth assets, such as Balanced and Growth, have given back a small amount of the strong gains built up over the past five years. However, in February things got back on track with a recovery in returns for all investment options.

Oil, China, US behind early volatility
It has been a turbulent start to the year for financial markets. Sharemarkets have gone up and down and currency markets have been volatile. The situation is reminiscent of the shakeup of August 2015 when global sharemarkets slumped.

The causes of such violent market moves are always complex, but there are four distinct factors contributing to this latest share market volatility:
 
  1. Falling oil prices: Now this is great if you are filling up your car, and you may have noticed petrol prices have fallen at the pump. It has also been a positive for NZ businesses, with a fall in their transportation costs. However, globally it has put downward pressure on sharemarkets. Ultimately we expect this to be a net positive as many companies start to benefit from lower transport and shipping costs.
  2. China: Recent reports show that China’s economic growth in 2015 (as measured by the change in Gross Domestic Product) was the lowest in 25 years.  A lot of countries around the world rely on China to buy the goods they produce, so a slowdown in China has had a negative impact globally.
  3. US: The US makes up 59% of the global sharemarket, so when the US sneezes, the world catches a cold. While the US economy has been improving, recent reports have showed some signs of weakness, with business confidence and growth rates weaker than expected.
  4. Japan: The Bank of Japan surprised the market by introducing negative interest rates. So basically instead of earning interest in your bank account, you would have to pay interest to the bank for them to hold onto your money. The reason they have done this is they want to discourage people from hoarding money in their bank accounts, and encourage them to spend it instead to help stimulate the economy.

How should investors respond?
First off, don’t panic - especially if you have a long investment horizon. Just when you think the markets are stringing together a series of losses, they often rebound. Trying to time the markets, or having a knee-jerk reaction to short-term volatility, is often when investors get caught out, and end up selling low and missing out on the upturn.
 
The outlook
Mercer expects global shares to continue on a somewhat bumpy path as uncertainty over global growth persists. However, the longer your investment horizon, the more time you have to ride out these ups and downs and grow your investment.
  

This information has been prepared by Mercer (N.Z.) Limited for general information only. The information does not take into account your personal objectives, financial situation or needs. Therefore, you should not act on this information if you have not considered the appropriateness of this information to your personal objectives, financial situation and needs. You should consult a financial adviser before making any investment decision.

 

This website is provided by Mercer (N.Z) Limited on behalf of the trustee of the Police Superannuation Scheme (PSS). The trustee pays a fee for the provision of this service, however this fee is not conditional on you using this service or acting on the information or advice provided through this service.

PSS Trustees Limited is the issuer of the Police Superannuation Scheme (PSS). A copy of the PSS product disclosure statement is available under Documents and forms and at companiesoffice.govt.nz/disclose.