Selected Market Indicators for Periods Ended 31 August 2020

Equity markets pushed higher in August, supported by continued improvements in global manufacturing data and an indication of persistently dovish central bank policies. At a sectoral level, Consumer Discretionary companies outperformed, while Utilities lagged, while purchasing manager indices remained in expansionary territory. The pandemic situation improved over the month in the US, notably in former hotspots such as Arizona, Florida and Texas. Commodities were broadly positive in August; Crude Oil had a strong month, as did Copper and Iron, reflecting the partial floor under industrial metal pricing as a consequence of increased manufacturing output.
 
The MSCI World Index had a strong month, up +6.3% (+5.1% in unhedged NZ dollars), with Japan leading the way in terms of country outperformance, up +7.9%. The NZX50 was positive, up +1.8%, while the ASX200 gained +2.8%. Bond markets were mixed, with NZ (+0.8%) continuing to deliver positive returns, while Global Bonds (-0.7%) slipped as rates rose.
 
An estimate of the Balanced Fund gross index return based on selected market indicators for August is +2.2%.
 
Significant developments include: 

• At the virtual Jackson Hole gathering of central bankers towards the end of the month, US Federal Reserve chairman Jerome Powell outlined an enhanced stance on monetary policy, allowing greater flexibility for temporary increases in inflation. The move signals a transition to an average inflation target, allowing the US central bank to overshoot its 2 per cent target to compensate for stubbornly low inflation, further galvanising expectations that US rates will remain at very low levels for years to come.
   
• Australia officially entered into a technical recession (two consecutive quarters of declining economic growth) for the first time since 1991. The Q2 drop of a -7.0% reduction in output – the largest drop since records started in 1959 – followed a -0.3% decline in Q1, and was worse than the -6.0% drop expected by many economists.
   
• The global tally of Covid-19 cases topped 25 million at month-end, with deaths exceeding 844,000. Just under a quarter of globally reported cases are in the US; Australia has now confirmed over 25,000 cases; New Zealand has over 1,700 in light of a recent Auckland cluster. 

Trans-Tasman Equities
New Zealand equities continued their positive run, up +1.8% over August, gaining despite a return to varying levels of lockdown around the country. Domestic equities are up +11.8% over the past 12 months, supported by a2 Milk and Fisher & Paykel which constitute c.30% of the index. Australian equities moved in a similar fashion, up +2.8% over the month, although continued to lag over the past year, down -5.1%.
 
Global Equities
Global equities were up +6.3% in local currency, pushed higher by continued easy monetary policy and the outperformance of mega-cap high-beta tech stocks in the US. Emerging markets were up +0.7% in unhedged NZ dollars, aided by an upward revision to Chinese economic growth forecasts and improved manufacturing activity.
 
Property and Infrastructure
Global listed property (+2.1%) and infrastructure (-0.3%) had diverging months, with accommodative policy supporting the former while the prospect of returning to varying levels of lockdown weighed on the latter. Both sectors continued to lag their equity peers over the trailing 12 months.
 
NZ Bonds and Cash
Government bonds (+0.8%) performed in-line with corporate bonds (+0.9%) in August, with the NZ composite index returning +0.8%. The NZ 10-year bond yield finished lower at 0.61%, briefly touching a low of 0.55%. The return for cash remained flat.
 
Global Bonds
Corporate bonds (-0.8%) outperformed both government (-1.0%) bonds in August, while the global aggregate index returned -0.7%. The US 10-year bond yield ended the month higher at 0.71%, rising as a result of better-than-expected economic data as US manufacturing activity continued to rebound from its pandemic lows.
 
Currency
The NZ dollar weakened against the Trade-Weighted Index by -0.5% in August, although strengthened against the US dollar (+1.5%), euro (+0.3%) and Japanese yen (+1.8%) as risk sentiment increased and investors shifted away from traditional safe-haven currencies. The Fed’s shift in inflation targeting led to continued downward pressure on the USD towards the end of the month.