Selected Market Indicators for Periods Ended 31 December 2018

Global markets fell sharply in December with most developed markets posting large negative returns.

Tightening financial conditions, ongoing trade tensions, slowing global growth and cautious corporate earnings forecasts combined to stir a number of prospective bears from an extended period of hibernation. Political risks, fuelled by another US government shutdown, violent protests in France and uncertainty over the passage of Brexit negotiations, are compounding investors’ concerns. In this risk-averse environment bond markets rallied over the month.

The MSCI World Index fell -7.9% in local currency terms over the month, with unhedged investors (-5.4%) benefitting from a weakening NZ dollar. The New Zealand and Australian markets (both down -0.1%) performed well ahead of larger developed markets. Global aggregate bonds performed strongly (up +1.4%) despite rising short-term US interest rates. Global Listed Property and Infrastructure markets also fell, although a little less sharply than their broader equity counterparts over the month, down -6.0% and -3.6% respectively.

An estimate of a Balanced Fund gross index return based on selected market indicators for December is -1.7%.

Significant developments include:
 

• The US Federal Reserve (‘the Fed’) continued to tighten monetary policy, raising the Fed Funds Rate target band a further 0.25% to 2.25% – 2.50%, with the accompanying announcement doing little to quell investors’ concerns stemming from increased market volatility in Q4.
• More conservative comments from the Fed Chair, Jerome Powell, early in 2019 have arrested some of this concern and markets have responded positively to the new, more constrained outlook for the US monetary policy in 2019.
• The arrest of Huawei deputy chairwoman and CFO, Meng Wanzhou, in Canada (at the request of the US) risked escalating trade tensions between the world’s two largest economies before meetings between the countries’ leaders late in December relieved immediate concerns.
• A partial shutdown of the US government started on 22 December 2018 as a result of Congress being unable to agree on a new federal budget. The shutdown has carried into 2019 with budget for a US-Mexico border wall apparently the major obstacle to reaching agreement.
• The NZ economy grew by 0.3% in the September quarter, coming in below RBNZ expectations of +0.7%.
   

Trans-Tasman Equities
The NZ and Australian share markets finished December well ahead of their global counterparts, the NZX 50 and ASX 200 Indexes both falling just -0.1% for the month. Interest rates in both economies have been on hold since the second half of 2016, NZ at 1.75% and Australia at 1.5%. NZ equities was the best performing mainstream asset class in 2018, returning +6.0%.

Global Equities
Developed markets – down over 12% before a post-Christmas bounce - returned -7.9% for the month. Global liquidity is reducing as US quantitative tightening continues and the European Central Bank’s quantitative easing program ended in December. In Emerging Markets (down -2.5% in local currency) India eclipsed Germany as the world’s eighth largest stock market.

Property and Infrastructure
Global Listed Property (hedged) delivered negative returns for the month (down -6.0%), the more defensive sector holding up better than the broader global equity market despite the further increase in US interest rates. Global Listed Infrastructure (hedged) performed better still (albeit still down -3.6%), benefitting from a more resilient utilities sector.

NZ Bonds and Cash
NZ government and corporate bonds were up in December (+1.0% and +0.9% respectively). As with offshore markets, NZ bond yields fell during the month; the 10 year NZ government bond yield finished the year at 2.38% (down from 2.59% at the start of December and 2.75% at the start of 2018). The 12 month return for NZ government bonds (+4.6%) lagged only NZ equities in 2018.

Global Bonds
Global bonds benefitted from the risk-off environment and fall in investor confidence during December, with global aggregate bonds returning +1.4% for the month. Government bonds (up +1.7%) outperformed corporate bonds (+1.2%) as companies face mounting financial pressures. The US 10-year bond yield fell 0.32% during the month, closing out 2018 at 2.69%.

Currency
The NZ dollar weakened against most major currencies over the month. The tightening of US monetary policy along with the negative trend in market sentiment (increasing risk aversion) contributed to downward pressure on the NZ dollar over the month. The largest movements were recorded against the JPY (-5.7%) and the EUR (-3.3%).