Selected market indicators for period ended 31 August 2018 

Global markets posted positive returns in aggregate during August.

However, regional returns were disparate, with strong returns in the US (driven by strong macro indicators and an absence of inflationary pressure) being offset by retractions in most other major markets. Within Emerging Markets, Turkey’s fragile economy was exposed by a perceived tightening of financial conditions globally and increased tension with the US. Contagion effects were subsequently seen across the whole sector. Unhedged positions produced additional positive returns as the NZ dollar weakened further, driven by the RBNZ setting expectations that current low interest rates are likely to remain in place until late 2020.

The MSCI World Index, representing developed markets, was up +1.3% in local currency terms (unhedged returns were up +3.9%). NZ markets posted strong gains, returning +4.5% for the month. Global Aggregate Bonds were up slightly (+0.3%) with gains in global corporate bonds (+0.5%) outpacing global government bond returns (+0.1%). Global Listed Property (hedged) continued its upward trajectory (+1.3%) while Global Listed Infrastructure (hedged) retracted slightly (-0.8%). Commodities continued to suffer, returning -1.8% over the month.

An estimate of a Balanced Fund gross index return based on selected market indicators for August is +1.8%.

Noteworthy developments include:

• The Turkish Lira plummeted in early August as the US imposed further tariffs on steel and aluminum imports from the country in response to the imprisonment of a US citizen by the Turkish government.
• The US markets extended their gains to mark the longest bull-run in history, as trade tensions appear to be having little impact on business sentiment and the major US economic indicators.
• Locally, the NZ market saw exceptional returns as the earnings season drew to a close with most NZX 50 companies surprising on the upside, seemingly unaffected by the business confidence index hitting a 10-year low.
• The RBNZ signaled that current low rates should be expected to remain until late 2020, much longer than markets had previously forecast, with RBNZ Governor, Adrian Orr, citing concerns around persistently disappointing growth.

Trans-Tasman Equities
The NZX 50 delivered exceptional returns in August, up +4.5%, reaching new all-time highs during the month. Australian shares, weighed down by political uncertainty, saw more modest gains, returning +1.4% (in local currency terms). The New Zealand share market continues to outpace the ASX over 12 months, the two markets returning +20.5% and +15.4%, respectively.

Global Equities
Developed global equity markets returned +1.3% in August, driven primarily by US markets (+3.2%). In contrast, the United Kingdom (-3.3%) and Europe (-2.4%) were impacted by the increasing likelihood of a “no deal” Brexit and uncertainty around the new Italian government’s budget plans. Emerging Markets saw losses in local currency terms (-0.5%), in addition to the significant currency devaluation seen across the sector during the month.

Property and Infrastructure
Global Listed Property (hedged) continued upward, returning +1.3% for the month, while Global Listed Infrastructure (hedged) retracted somewhat, falling -0.8%. Over the past year, both sectors are up with property (+7.8%) outpacing infrastructure (+1.9%).

NZ Bonds and Cash
New Zealand bonds continued to deliver positive returns in August, with Government Bonds (+1.3%), outperforming Corporate Bonds (+1.0%), bringing 12 month returns to +5.1% and +4.7% respectively. The 10 year NZ government bond yield fell further over the month to 2.61%, with the RBNZ setting expectations that the current cash rate (1.75%) will endure until late 2020.  

Global Bonds
Global bonds markets saw modest gains during August, returning +0.3%. The US Federal Reserve signaled that any acceleration in the current gradual rate hike program would require strong inflation as a trigger. Government bonds returned +0.1% while corporate bonds returned +0.5% as credit spreads continued to tighten. The US 10-year bond yield dropped 0.13% to 2.86%.

Currency
The NZ dollar weakened against most major currencies as the RBNZ set expectations of low rates for longer, causing NZ investments to look less attractive to global investors searching for yield. The largest movements were recorded against the JPY (-3.5%) and USD (-2.5%). The NZ dollar was valued at 0.66 US dollars at month end. The trade-weighted index (TWI) was down (-1.9%) over the month, ending at 72.1.