Selected Market Indicators for Period Ended 31 August 2019

August was a month marked by volatility, with equity markets struggling as investor risk appetite retreated amid fears of a global recession. With US President Donald Trump back on the offensive and China unwilling to bend to his demands, international trade rhetoric did little to calm investors’ reservations. As central banks in major economies try to contain the damage, investors sought the relative security of government bonds as the worldwide political landscape became increasingly fractious and support for global equities showed signs of unwinding.

Developed equity markets posted negative returns over the month as the MSCI World Index returned -1.9% in local currency (+2.5% in unhedged New Zealand dollars). NZ (-0.8%) and Australian (-2.4%) equities were no exception, while the more defensive Global Listed Property (+2.0%) and Infrastructure (+1.7%) sectors bucked the negative trend of other growth assets. Bond markets performed well in the risk-off environment, with NZ (+1.8%) and Global (+2.3%) Aggregate Bonds well ahead of their equity counterparts over the month.

The NZ share market had a slower month than its global counterparts, but still posted a positive return (+1.7%). The MSCI World Index was up +3.8% for the month in local currency terms, and +5.9% in unhedged NZ dollars. The Global Listed Property (-1.1%) and Infrastructure (+0.9%) sectors both had a weak month relative to the broader share market. Bond markets suffered from both the increasing attractiveness of equity markets and 10-year dividend yields across many developed markets coming back from historic lows; NZ and Global Aggregate Bonds returned -0.2% and 0.0% respectively for the month.

An estimate of the Balanced Fund gross index return based on selected market indicators for August is +0.9%.

Significant developments include:
 

• The Reserve Bank of New Zealand (RBNZ) cut its Official Cash Rate (OCR) by 0.5% to 1.0% in early August - the largest cut since March 2011 and only the third cut of its size ever. Despite the size of the cut coming as a surprise to local markets, the RBNZ Governor Adrian Orr insisted that a lower OCR was needed to meet future employment and inflation objectives.
• Central bankers from around the world met at the 2019 Economic Symposium in Jackson Hole at the end of the month. At the meeting Reserve Bank of Australia (RBA) Governor, Philip Lowe, reinforced shared concerns over the current effectiveness of monetary policy.
• The G7 Summit was held in Biarritz, France at the end of August, with attendees including US President Donald Trump and new UK Prime Minister Boris Johnson. The meeting offered a welcome reprieve for markets, recovering some ground on (unsubstantiated) assertions from  President Trump of positive progress on the US-China trade front.

Trans-Tasman Equities

The NZ and Australian share markets fell alongside their developed equity peers over the month, down by -0.8% and -2.4% respectively. The continued devolution of global attitudes towards trade did no favours for the two trade-based economies in August; despite this, 12-month returns for both markets remain well ahead of other developed market peers.

Global Equities

Developed equity markets (-1.9%) experienced volatility over the month, struggling to hold on to their recent gains as international recessionary fears grew. Despite increasingly accommodative central bank stances, investors favoured defensive assets and sold equities. Emerging markets were particularly affected, down -2.5% for the month.

Property and Infrastructure

The global listed property and infrastructure sectors were welcome diversifiers for investors over the month, up +2.0% and +1.7% (NZD hedged). Both sectors benefitted from attitude shifts to defensively-orientated real assets, supported by increasingly low interest rates. Over the last 12 months both sectors performed well, up +8.9% and +15.7% respectively. 

NZ Bonds and Cash

NZ composite bonds returned +1.8% as investor preferences shifted away from equites and towards more defensive assets. The NZ 10-year bond yield continued to fall to record levels, touching 0.98% on 16 August before recovering to end the month at 1.07%; its Australian counterpart also fell below 1% during the month, finishing August at 0.89%. 

Global Bonds

Global aggregate bonds returned +2.3%, gaining strongly in the risk-off environment that took hold during the month. US Treasury yields fell sharply amid increased demand for “low-risk” government debt, the 10-year bond yield finishing the month at 1.50%, while the 30-year hit an all-time low of 1.90%, falling below the 3-month Treasury bill rate for the first time since 2007. 

Currency

The NZ dollar weakened against all major currencies over the month, with the largest shifts coming against the Japanese yen (-6.6%), US dollar (-4.4%) and British pound (-3.9%). The surprising scale of the OCR cut by the Reserve Bank of NZ, combined with investor’s general flight to safety, contributed to the depreciation of the NZ dollar against more “safe haven” currencies.