Market commentaries: archive

2023 Market Review

2023 was a very good year for global share and bond markets which finished the year higher, delivering healthy returns for investors and the customers in our AMP diversified funds.
This market performance translated into strong returns for customers over the year. For the 12 months ending 31 December 2023, the AMP KiwiSaver Scheme diversified funds produced the following returns (after fees and before tax):
• AMP KiwiSaver Conservative Fund: 7.92%
• AMP KiwiSaver Moderate Fund: 9.25%
• AMP KiwiSaver Moderate Balanced Fund: 10.64%
• AMP KiwiSaver Balanced Fund: 12.07%
• AMP KiwiSaver Growth Fund: 14.15%
• AMP KiwiSaver Aggressive Fund: 14.94%

Markets were strong across the board

In the first half of the year, share market returns were largely driven by a select number of large technology companies in the US, benefitting from the widespread enthusiasm for artificial intelligence (AI) following the meteoric rise of Chat-GPT. The increased interest in AI saw the US technology-heavy NASDAQ index surge over 31% for the first half of 2023; its best first half return in 40 years.
In the second half of the year, investment returns were more linked to inflation expectations, expected changes in interest rates, and the economic outlook for 2024. Despite higher interest rates impacting share markets, other diversified portfolio sectors such as cash investments and short-term bonds offered attractive returns for diversified investors benefitting from the higher interest rates offered.
Overall, investors had a lot to be happy about in 2023. The US share market finished the year with a gain of more than 24%, while in Europe the share market was up nearly 17%. Closer to home, the Australian share market finished 2023 with a 12% increase, as New Zealand lagged somewhat, up approximately 3% over the year.
Returns from emerging market economies lagged that of developed markets, as China failed to experience the economic recovery it had anticipated. Lower than expected global trade demand, ongoing tensions with the US, and concerns over debt levels in the property sector saw the China share market fall over 10% for the year.
For the AMP diversified funds we manage, the asset allocation decisions we made at the beginning of the year have overall made a positive impact for our customers. Overweight exposure to global shares benefitted our returns in 2023, as did our allocation to New Zealand inflation-linked bonds. Having greater foreign currency exposure in our portfolios also benefitted returns due to the drop in the New Zealand Dollar during the year.

Inflation and interest rate pressures

Investment outcomes in the second half of the year were largely centred around the inflation and interest rate story, and how it all looked heading into 2024. Globally, the latest inflation numbers show that the rate of price increases for key goods and services has possibly reached its peak and is now slowly starting to return to target levels – a hopeful sign for investors.
As inflation pressures in the economy begin to subside, so too has the aggressive stance central banks have taken on interest rates. In most major developed economies, central banks have indicated that interest rates may have peaked or are near their peak, as the conversation shifts away from when the next interest rate increase will be to when central banks may start cutting rates. Higher interest rates often put downward pressure on the value of companies, so this change in rhetoric has been supportive for investment returns in the second half of the year.
Whilst the ongoing uncertainty over the direction of interest rates has confused share markets in 2023, it has more directly impacted the bond market, which investors often look at to make judgements about the economic outlook. As an example, in 2023 we saw the yield on the 10-year US Treasury bond, which is often regarded as a proxy for many other important financial matters like future economic growth, jump to levels not seen in 15 years, putting downward pressure on bond and company valuations. In the later part of 2023, as central banks began discussing cutting rates, the yields on these bonds declined. This has benefitted the performance of the share and bond markets, and ultimately returns for customers.

Focusing on the long-term

2023 has been a great year overall for investment returns across the board, but that doesn’t mean returns have all been in one direction. There have been several events during the year that caused short-term disruption to markets, but in the end, the overall impact of these events was minimal, with most markets performing better than expected. This is why we regularly remind our customers to avoid getting caught up in the short-term news or emotive responses, and instead focus on the long-term.
There were a multitude of events throughout 2023 that had to be traversed by the markets, but the overall trend is upward. Markets experienced the collapse of some regional banks in the US, surprise interest rate decisions by central banks, war breaking out in the Middle East, and bond yields hitting 15-year highs, but looking at the year, the global share market returns were still strong.
Although it can be unsettling to see your investment balance move around, short-term movements are normal and a part of investing. Although it is only one year, this chart is a good reminder of the ups and downs in investment markets, and why it is important to always focus on your longer-term savings and investment objectives, and avoid getting caught up in the short-term news and market events.
2024 will no doubt bring its own set of challenges and opportunities, as does any other year in investment markets, so having a well-diversified portfolio and focusing on your long-term objectives will be just as important.
Thank you for continuing to read our market commentaries. We look forward to bringing these to you regularly in 2024, and as always, if you need a little help with your savings goals or have any questions, please contact your adviser or AMP for a little help.

Quarterly market commentary

Investment returns from share and bond markets eased during the September quarter, losing some of the momentum experienced in the first half of the year. Despite this, overall returns since the start of 2023, and over the past 12 months, remain positive for our diversified customers.

Diversification is always key

Overall, it was a difficult three-month period for markets. The projection of interest rates staying higher for longer caused a jump in bond yields to decades-long highs, putting downward pressure on share market valuations, bond valuations, and the outlook for growth companies.
Although parts of share markets are negatively impacted by higher interest rates, other portfolio assets offer attractive returns for diversified investors. The benefit of higher interest rates are the interest rates available on short-term bonds and cash investments in the market. It also means investors now demand greater returns for longer-term investments, so newly issued bonds provide a potential higher long-term rate of return for investors.
As interest rates increase, so too do the interest rates available on cash investments. As an example, the current running yield on the AMP cash fund is 5.7% before fees and tax. As a diversified investor, having allocations to different asset classes will mean exposure to different opportunities in markets. The asset allocations for our diversified funds are designed to navigate through multiple investment and market cycles, which is very important for customers saving for retirement and managing retirement savings.

A summary of the last three months

Following a great six months to start off 2023, global share and bond market returns retracted over the past three months, as investors come to the realisation that the new economic period we are entering means interest rates will remain higher for longer.
This realisation was further underlined by the US Federal Reserve’s comments at its latest meeting, projecting another possible interest rate increase and no rate cuts until the second half of 2024. This sentiment contributed toward the US share market finishing the quarter lower, as investors begin to realise that central banks aren’t going to come to the rescue as the economy slows with interest rate cuts as they have done in the past.
The European markets were also down over the quarter as Europe continues its fight against inflation, while in Australia, the share market performed better relative to most of its developed market peers.
The economic recovery in China continued to stutter over the quarter, while the share market was weighed down by a lack of consumer demand and worries over the level of debt in the property sector. There are, however, some positive signs that China's economy is beginning to stabilise through the recent Government stimulus measures that have been put in place.
The New Zealand share market fell more than many other global markets over the quarter, while the NZ Dollar continued its 2023 trajectory, down against the USD over the three-month period. A falling NZ Dollar helps returns on offshore investments that are unhedged, so this provided some ballast to portfolios to the extent they are unhedged. Although, the news of stronger-than-expected GDP numbers, a bounce back in dairy prices, and the initial signs that the Chinese economy is stabilising, present more positive local news.

Outlook

It's important to recognise that there hasn’t been a large shift in the underlying fundamentals of investment markets over the quarter. The first half of 2023 delivered great returns for investors, and when this happens it’s normal for markets to take a breath as investors take profits. This is what we experienced throughout the quarter.
The view that interest rates will remain higher for longer, is a view we have held for the past year and has not changed. We believe we are in a new economic regime of higher interest rates and where inflation will settle above recent historic levels.
Over the quarter we have also seen the latest economic data supporting the view that labour markets are sustaining growth despite headwinds in global economies. Add this to strong consumer spending and volatile oil prices, and it leads to a difficult time for central banks in their fight against inflation. It is becoming clearer that the recent interest rate increases are constraining economic activity and reducing inflationary pressures to some degree, but keeping interest rates high is needed to keep bringing inflation back down to target levels.
Heading into the remainder of 2023, the upcoming US corporate earnings season will be an important period, providing insight into how companies around the world are holding up amid the current market environment, and importantly, the future outlook.
In New Zealand, the upcoming election will likely add to market sentiment depending on the outcome, while house prices are expected to modestly increase after reaching their bottom earlier in the year.
If you have any questions regarding your savings and investments, make sure to reach out to your adviser, or contact AMP for a little help.

Quarterly market commentary

Summary

The June quarter delivered healthy returns for investors, with global share and bond markets generating positive gains over the three months. The completion of June marked the end of the first half of the year, producing great investment outcomes for customers in the AMP diversified funds. To illustrate the strong growth in markets this year, since 1 January 2023, the AMP KiwiSaver Balanced Fund has returned 7.9% after fees, while the AMP KiwiSaver Aggressive Fund returned 10.7%.

Great quarter for investment returns

The past three months saw the majority of global share and bond markets deliver healthy returns, continuing the momentum from the first quarter of 2023. Technology, and more specifically, Artificial Intelligence, was the hot topic of markets, off the back of widespread enthusiasm following the meteoric rise of ChatGPT. Big rallies in large tech companies like Apple, Microsoft, Meta, and Nvidia pushed the US technology-heavy NASDAQ index to surge 31.7% for the first half of 2023 – its best first-half return in 40 years.
The rally in the technology sector led the broader US share market higher, gaining 8.7% for the quarter, while in Europe the share market was up 2.8%. Closer to home, the Australian share market gained 1%, outperforming the New Zealand share market which lagged behind with a quarterly gain of 0.3%. Returns from emerging market economies lagged developed markets, eking out a small gain over the quarter, with China’s share market weighed down by ongoing tensions with the US and concerns about the country’s economic recovery.
Overall, it was a strong quarter for investment markets, and the customers invested in our AMP funds. The AMP KiwiSaver Balanced Fund generated a return of 3.7% for the quarter, with the AMP KiwiSaver Aggressive Fund up 5.4% for the three-month period.
Overweight exposure to global equities benefitted the returns of our funds over the quarter, as did our allocation to New Zealand inflation-linked bonds. Also, having greater foreign currency exposure in our funds helped given the NZD fell during the period.
Over the quarter we implemented our annual strategic asset allocation review, which resulted in the introduction of NZ Corporate Bonds to our more income-focused diversified funds. This comes as the current high-interest rate environment offers encouraging fixed-income yields. We believe this will support the returns of the more conservative portfolios as it provides more diversification within our fixed interest allocations, and captures the improved yields available in this market. The completion of this review also saw an increased allocation to US and NZ inflation-linked bonds within our diversified funds, and a reduction in exposure to cash.

Economic data shows inflation is declining

The markets have been keeping a close eye on the myriad of economic data over the past 12-months, to determine the impact of interest rate decisions by central banks on consumers and company earnings.
Recent economic data supports the view that the rate of inflation around the world is beginning to cool, following 12-18 months of high inflation. Lowering rates of inflation has generally seen central banks take a step back from their moves to increase interest rates, to re-evaluate their current positions and assess the impacts of past interest rate rises before making further changes to their settings.
Closer to home, the Reserve Bank of New Zealand (RBNZ) lifted interest rates by 0.25% at its May meeting, taking the Official Cash Rate (OCR) up to 5.5%. However, much to the surprise of many commentators, the RBNZ signalled the OCR had reached its peak at 5.5%. This comes as the New Zealand economy contracted in Q1, the second consecutive quarter of negative GDP growth.
What central banks will continue to focus on will be labour market data, in an effort to gain insight into the tight and resilient job markets. Unemployment data and the most recent job reports indicate that the labour market remains strong, which may force central banks to keep interest rates higher for longer.

Market movements are a normal part of investing

The strong investment gains experienced over the quarter didn’t come without the normal market ups and downs, with a couple of key events causing some uncertainty across markets. One of these was the US debt ceiling which covered the headlines in May, with reports coming out that the US Government would begin to run out of money to pay its debt obligations at the beginning of June unless its debt ceiling was raised.
Although conversations went on throughout the entirety of May, a deal was struck to raise the debt ceiling in early June, allowing the Government to borrow more money in order to ensure no payments were defaulted on. This agreement provided relief to markets, particularly the US bond market, which experienced heightened market movements in the lead-up to the agreement.
Regardless, the markets over the quarter delivered strong returns, despite some of the ‘headlines’. This emphasises our regular view in these commentaries about not getting caught up in the short-term news, which are often negative in nature. Staying the course and focusing on the long-term fundamentals, is what we believe is more important when planning savings and investment goals.
If you have any questions regarding your savings and investments, make sure to reach out to your adviser, or contact AMP for a little help.

Summary

March was another good month for markets to finish off a really positive quarter for investment returns. Investors in all AMP diversified funds experienced healthy returns over the past 3 months – particularly where funds have a higher weighting to growth investments. The AMP Balanced Fund produced a 4.04% return after fees and the AMP Aggressive Fund produced a 4.99% return after fees, between 1 January and 31 March.
Positive month and quarter for global markets and customers
March saw strong returns for many global share and bond markets, as investors shook off a relatively poor February to finish the quarter on a high. Despite the recent struggles in the financial sector, the US share market was up 3.7% for the month to finish the quarter with a 7.5% gain. The European market edged up 0.1% for the month to finish with a quarterly return of 8.7%, while in China the share market finished up 3.8% for the quarter after rising 0.8% during the month.
Despite overseas markets performing well, Australia and New Zealand share markets finished the month lower, down -0.2% and -0.1% respectively. However, a negative month wasn’t enough to stop the markets from posting a positive quarter, up 3.5% and 3.6%.
The recent market uplift has led to a great quarter of investment returns for our customers, with the majority of our AMP branded Diversified funds generating their best quarterly return since 2020.
Our investments into Inflation-Linked Bonds in New Zealand and the United States also added value to our diversified portfolios over the month, with these investments performing strongly, significantly outperforming traditional government bonds.

Diversification is still key for investors

There are few ‘free lunches’ when investing, but diversification is one. Diversification in investment portfolios enables investors to navigate all parts of the investment and economic cycles. For customers invested in our AMP-branded diversified funds, we have over 6300 investments, which means your exposure and risk is spread over thousands of investments.
March was a month where this diversification protected customers when the financial news headlines were dominated by the failure of two medium-sized US banks, causing uncertainty across the financial sector. The US Regulators seized both Silicon Valley Bank and Signature Bank after customers began withdrawing their funds by the billions, resulting in some fears that the banks would not be able to cover all of the withdrawals.
Share markets initially fell on the news with issues also arising in Europe as Credit Suisse began experiencing difficulties. Again, regulators acted quickly, with the Swiss Government stepping in to help arrange a buyout by rival bank UBS. Despite this, share markets recovered quickly and as we said earlier, provided strong returns over the quarter.
Our exposure to these banks within our portfolios was extremely small, emphasising why diversification is key when the unexpected occurs. We value this principle highly at AMP, and it is a key part of our philosophy of managing investment.

Outlook

Our outlook for the remainder of the year remains unchanged from previous commentaries since December 2022. The past few months have produced strong returns for investors after a challenging 2022, which re-enforces our view that remaining invested through all parts of the economic cycle is important to achieve your long-term plans.
Predicting markets over the short term is fraught with challenges, but we have more confidence in the view over the next 5 years that investors will be rewarded for remaining invested and focusing on continuing to contribute to their savings plans.

Summary

The majority of global share and bond markets struggled in February, as January’s rally lost momentum. Some higher-than-expected inflation numbers and signs pointing towards resilient labour markets have investors wary that central banks may keep interest rates higher for longer to wrestle inflation under control.
Although global share and bond markets finished the month lower, the AMP-named funds that we manage performed well relative to most of our peers in the market.

Global markets struggled during February

The market rally in January failed to continue over into the second month of the year, with bond and share markets posting losses for February. From a New Zealand investor perspective, the decline in the New Zealand dollar over the month cushioned the fall in returns for overseas investments that are exposed to currency movements.
The US share market dropped 2.4%, with the energy sector experiencing the largest decline. Despite the activity in China’s economy beginning to pick up, its share market struggled to reflect the increased activity. The Australian share market was weighed down by the materials sector, falling 2.5% for the month, while in New Zealand some mixed company earnings results saw the share market drop 0.6%.
Europe was a bright spot for markets in February, with the share market seeing a gain of 1.7%. This was largely caused by markets in Europe having greater exposure to the financial sector, where higher interest rates can benefit banks and other financial firms. However, the European share market isn’t immune to the problems that other markets are currently facing, and still has issues it needs to work through in the short term.

Recent weather events will likely add to inflation pressures

The devastation caused by the recent cyclone in New Zealand is evident, with widespread damage to parts of the North Island. The economic cost of this damage is not yet known; however, it is clear that there will be ongoing disruption to businesses for some time.
The impacts of cyclone Gabrielle will be inflationary, meaning inflation will likely remain elevated for longer in New Zealand. Further pressure will be applied to supply chains after the damage to stock and infrastructure, while the cost to rebuild the impacted areas will likely put upward pressure on prices, driving the cost of goods and services up – especially in the construction, insurance, and food sectors.
The Reserve Bank of New Zealand recently had its first meeting of the year to discuss interest rates, choosing to raise them by 0.50%. The RBNZ had a difficult decision considering the recent events, however, monetary policy is relatively restricted in the help it can provide in an event like this. Because of this, the RBNZ chose to look through the short-term impact of the cyclone and focus on bringing inflation down, leaving fiscal policy (government spending), which is better suited at times like these, to help in the recovery.

Q4 Sustainability report

AMP is very committed to investing sustainably and supporting a better future for our planet, including working towards our net zero goal – zero net carbon emissions in our portfolio by 2050 or sooner. This is something we are working hard towards, and you can view our progress in our recently released Q4 sustainability report
Some of the highlights in this report are the decrease of our portfolio’s carbon emissions by 67% over the past 18 months, and increasing our Green Bond exposure, which are bonds that provide capital for specific projects with climate change mitigation and environmental outcomes. The total Green Bond exposure in our portfolio now equates to $65 million.

Market outlook

February has demonstrated that 2023 is not going to be a straightforward year for global markets. The latest inflation numbers indicate that inflation is remaining stubbornly high, while consumer spending and labour markets around the globe continue to remain resilient, all while unemployment rates are at record lows.
This points towards more market ups and downs as the battle for central banks to wrestle inflation under control continues. However, downturns in the market can provide an opportunity to buy assets at a lower price. This is the benefit of regularly contributing to your investments, an approach called dollar-cost-averaging.
It’s a good time to review your investments to make sure you’re in the right fund for your stage of life and risk tolerance. If you need some guidance with your investments, please reach out to your adviser or contact AMP for a little help.

Summary

Investors have had a positive start to the year, with global bond and share markets coming strongly out of the blocks. There is evidence to believe that price rises (as a result of inflation) may be slowing down, while the Chinese economy has been granted a boost as the borders re-open following the easing of its zero-Covid policy. The recent market developments point toward long-term optimism for markets and investors, however, before we get to that point, there is still lots to work through in 2023.

Encouraging start to the year
January provided investors with bouts of optimism to kick off the year, as investors hope to put the losses experienced in 2022 in the rear-view mirror. The typical market rally that is often experienced in December came a little late, with a market uplift in January leading to positive gains across bond and share markets worldwide.
In local currency terms, the US share market generated a monthly gain of 6.3%, while in Europe the share market gained 6.9%. Closer to home, the Australian share market was up 6.2%, while New Zealand lagged slightly, seeing a gain of 4.3% for January. The China share market was an outperformer for the month as it further eases its zero-Covid policy, up 8.3% for the month¹.
The strong performance of China has led to the Emerging Markets sector seeing a monthly gain of 5.6% in NZD terms, which has helped the returns for investors in our AMP diversified funds, where we have exposure to this asset class. Our allocation to NZ Inflation-linked bonds also added value for our diversified portfolios as the asset class performed strongly over the month, outperforming traditional Government bonds.

Inflation numbers providing optimism for investors The January market rally was largely driven by the latest inflation numbers suggesting that the price rises of key goods and services across the globe may be starting to cool. Investors have been keeping a watchful eye on this data for the past twelve months in the hope that as inflation begins to slow, this should also slow the aggressive interest rate increases that central banks have been using to wrestle inflation under control.
The most recent monthly inflation number out of the US shows that in December, inflation sat at 6.5% on an annual basis, down from the 7.1% reading in the month prior and the 9.1% peak in June of 2022. While positive signs are beginning to show, it appears to be a different story in New Zealand as we continue to battle with the prices of food and other essential items.
The market has provided optimism, but over the long-term Investor confidence has been given a boost recently following some positive market developments -one of which has been the reopening of China’s borders. After three years of closure, China has further relaxed its zero-Covid policy and will completely reopen its borders, dropping testing requirements and quotas. Not only has this move seen China’s share market perform strongly over the month, but the prospect of China returning to its production capacity prompts excitement that some global supply chain issues may begin to subside as production ramps up.
However, there are concerns that as China reprises its role as a low-cost producer, easing global supply bottlenecks, the revived demand for raw materials and energy that they require will push up the prices of those commodities. We know that energy prices have been a key input into inflation, so this is something that investors and central banks will remain wary of.

Market outlook
Although there is lots to be optimistic about in markets, this optimism should be put in the context of a long-term outlook, compared to what we might experience in 2023. There are still concerns in the market that will likely cause volatility in the short-term - economic recessions are anticipated in many countries, while the true effect of central bank interest rate increases are unlikely to have been fully felt. This points toward an ongoing uncertainty in markets over the next six months as Governments and central banks navigate the changing economic landscape.
What we do know is that market ups and downs are a normal part of investing. Focusing on your investment and savings time horizon through the short-term noise will help you achieve your long-term savings goals. If you need a little help with your savings or investments, please contact your adviser or AMP.

¹ Returns are sourced from S&P Dow Jones Indices Index Investment Strategy Dashboard

2023 Global Outlook

Looking back over the year

2022 was a challenging time for share and bond markets around the world. Much of what we have experienced throughout last year can be split into three key themes:
1. Record high levels of inflation
2. Rising interest rates
3. Increased global political tensions.
These challenges were not a surprise and were broadly predicted by our investment partner BlackRock, within their Global Outlook for 2022, which was published late in 2021.

What to expect from the year ahead

At the end of last year, BlackRock released its 2023 Global Outlook, which is again centred around 3 key themes they believe will be evident in markets throughout this year. These themes are:
1. Pricing the damage - a consideration of a recession in 2023 and whether markets have priced in the impacts of a recession
2. Re-thinking bonds - where higher interest rates and increased yields provide an opportunity to consider how we capture value in bonds
3. Living with inflation - the situation where inflation is expected to settle at levels higher than the pre-pandemic era, and that there are structural changes in the economy that are here to stay.

What might this mean for investment markets in 2023?

We expect central banks to pause on their interest rate increases as inflation comes down from the levels seen in 2022. This should be supportive for shares and bonds relative to last year. However, central banks and governments, around the world and here in New Zealand, will continue to face the challenge of balancing growth in economies with inflation, meaning that we will continue to focus strongly on how we position our diversified portfolios through the structural changes that the world’s economies are navigating in this post-pandemic era.
The economic landscape has changed significantly over the past couple of years. A global pandemic and a rise in geo-political tensions, not seen since World War II, has accelerated the changing playing field. Whilst Covid was an unpredictable event, an ageing population, the breakdown of globalisation due to political tension and climate change are challenges that will exist for years to come. This is leading to a structural change in economics and how we think about investment markets.

Our partnership with BlackRock

For us at AMP, and our customers, this is why we partner with BlackRock - the worlds largest investment company - to help manage our portfolios. We think that utilising their global expertise and insights into economics, markets and strategy will help position our portfolios to navigate these changing times.
There will continue to be challenges in markets - as there always have been - but the changes we have mentioned also bring opportunities for those who are tuned into the best insights and investment thinking.

Stay focussed on long-term objectives

2022 was certainly a challenging year for investors and savers and it is good to put that year behind us. We don’t think 2023 will be so negative, but the crystal ball is still a bit hazy given the global environment we all live in.
As always, we encourage customers to continue to focus on their long-term investment objectives, as trying to time the market’s ups and downs is fraught with difficulty. Retirement saving outcomes are more directly influenced by personal savings rates and having the right strategy based on your plans for the future.
As always, if you do have any questions or want to discuss your plans, please contact your Adviser or AMP for a little help.

Summary

November was another good month for investors, as global bond and share markets continued the positive momentum experienced throughout October to finish higher for the month. These returns came off the back of some lower-than-expected inflation numbers out of the US, whilst encouraging comments from the US Federal Reserve provided optimism that future interest rate increases will begin to slow. There was also a positive shift in the China market, as emerging market shares rebounded to outperform their developed market counterparts.

Another strong month for global markets

November saw many global bond and share markets generate positive returns, recouping some of the losses experienced over the year.
The market gains in November came after increased hopes of a slowdown in interest rate increases by central banks, while mid-term elections early in the month resulted in a divided US government. This is a result that markets like as it represents policy stability over the next couple of years, i.e. no major surprises for markets.
In local currency terms, the US share market gained 5.5%, while Europe’s market saw an increase of 7%. In Asia Pacific, Australia returned 6.6%, while in China, a strong month saw it generate a return of 15.7%¹.
Closer to home, the New Zealand share market gained 1.9% for the month, while NZ Inflation-linked bonds performed well, generating a return of 1.3%. November saw the NZ dollar finish up 6.9% against the US Dollar, reducing returns for unhedged offshore investments.
These market gains are supportive for the AMP-branded funds in our schemes, given our relative overweight position in emerging markets and our exposure to inflation-linked bonds in New Zealand and the US.

Positive economic data out of the US

The returns in November were in large part due to promising economic data out of the US. The recent figures gave investors further confidence that the Federal Reserve may soon begin to slow its interest rate increases – something that investors have been hoping for over the past few months.
The most recent inflation numbers showed that in October, US monthly inflation came in lower than expected, rising 0.4% for the month to a year-on-year figure of 7.7%. This increased optimism that while inflation is still a threat to the US economy, pressures could be starting to cool.
Investors’ were also buoyed as the US Federal Reserve Chairman, Jerome Powell, suggested smaller interest rate increases could start as early as December. The comments sent share markets on a positive rally on the last day of the month to help markets cement their monthly gains.

A welcomed shift in China share market

China’s share market saw a positive shift in November, outperforming a large portion of share markets around the globe. This was a welcomed change, as the market environment in China throughout 2022 has proved to be challenging.
The rally follows months of market and economic struggle, largely influenced by the prolonged zero-covid policy which has dampened consumer confidence and maintained supply constraints. This has flowed through to the share market, with the uncertainty weighing on investment decisions.
November was a welcomed change of tune for the sharemarket in China. Property stocks were boosted by new supportive measures, while tech stocks performed well following strong earnings reports and hopes of the economy re-opening in early 2023.
Although protests to end the strict covid protocols occurred during the month, the latest messaging from the government remains promising. Health officials are encouraging elderly vaccinations, while there are broader signs of shifting away from its zero-covid policies. These latest decisions have lifted the region’s stock market to gain back some of the losses it experienced in 2022.

Market outlook

2022 has been a challenging year for global share and bond markets, with a number of factors weighing heavily on investor sentiment and confidence. However, November has demonstrated that even through challenging times for markets, volatility does go both ways. Market ups and downs are a natural part of investing – which is why it’s important to remain invested so you don’t miss the ups. That means sticking with your investment strategy and focusing on the long-term objectives, rather than getting caught up in the short-term noise which is often of a negative tone.
As global events continue to unfold heading into 2023, we remain with the view that markets will remain unsettled in the near term, however, we don’t expect returns to be as bad for investors as they have been in 2022. Make sure to look out in January for the release of our 2023 outlook video, where we’ll present our view on what to expect next year.
As always, if you have any questions regarding your investments, please contact your adviser or AMP.

¹ Returns are sourced from S&P Dow Jones Indices Index Investment Strategy Dashboard

Summary

A comeback in most global sharemarkets provided investors with excellent returns over the month. These returns have come despite a mixed third-quarter corporate earnings season, while the release of new economic data paints a picture of stubbornly high inflation and resilient labour markets around the globe. The October returns provided optimism for investors, with some US sharemarket indices producing their best monthly return since 1976.

Positive month for global markets

Global markets bounced back in October, providing investors with some reprieve from the market downturn we have experienced throughout 2022.
The market gains in October come despite more economic data indicating that high inflation is persisting, and the labour market remains strong – putting pressure on central banks to continue to raise interest rates. The worry on many investors’ minds is how much high interest rates will dent economic growth, and what the economic impact will be.
In local currency terms, the US sharemarket gained 8.1%, sharemarkets in Europe were up 6.2%, while Australia and New Zealand saw increases of 6.0% and 2.5% respectively. Despite the positive month for most developed markets, the emerging markets continued to struggle, falling 2.6% for the month. This is largely due to China, where the strict zero-covid policy is rattling consumer confidence and heavily impacting the economy. The Chinese sharemarket was down 9.6% for the month, while the property market continues its slump.
The market returns in October have been largely widespread, as demonstrated in this chart which shows how global markets have performed over the month – the blue shading illustrates that most markets experienced a good month.

Mixed quarterly earnings results

October marked the start of corporate earnings season in the US, providing investors the opportunity to gain more insight into how the recent economic conditions have impacted the financial results of companies over the past quarter.
Over half of the companies in the S&P500 index (representative of the US sharemarket) have released their reports, with 73% reporting quarterly earnings results that are above analysts’ expectations. This is above the long-term average of 66% - suggesting that certain companies are holding up ok amid the challenging economic conditions.
Despite some encouraging quarterly results, we are beginning to see the current economic conditions having an impact in the way of lower growth outlooks over the next 12 months. A number of companies have downgraded their growth expectations, as the worries of an economic recession continue to impact business decisions. Along with a weaker economic outlook, we have seen underwhelming results from some large tech companies like Alphabet, Meta, Microsoft, and Amazon, who failed to beat analysts’ earnings and revenue expectations.

Market outlook

The ongoing challenges markets have dealt with throughout 2022 will potentially persist for a while yet. As a result, our view remains that markets will be unsettled in the near term. The high inflationary environment continues to challenge central banks, all while companies are trying to best navigate the challenging economic conditions around the world. Add in the ongoing Russia/Ukraine conflict and rising energy and food prices in Europe, this points to continued uncertainty for markets.
October has demonstrated that not all volatility is bad, and it goes both ways. Market ups and downs are a natural, and an inevitable part of investing. This is why it’s important to remain with your investment and savings strategy, and to focus on the big picture, so you don’t miss out on the market rebounds like we saw in October.
If you need a little help with your savings or investments, please contact your adviser or AMP.

Summary

September was another difficult month for investors as share and bond markets finished the month lower. The big story over the month was the continuation of the determined rhetoric about fighting inflation and the future outlook from central banks around the world. In our commentary this month, we also talk about the importance of continuing to contribute to savings during these times, and why we need to maintain a long-term perspective during challenging times.

Difficult month for investors

September provided little reprieve for investors, as markets continue to deal with the sell-off in shares and bonds that we have seen throughout 2022. From a New Zealand investor perspective, the fall in the New Zealand dollar over the month cushioned the fall in returns in unhedged or partially hedged offshore investments.
The high inflationary environment continues to put pressure on markets, as investors remain laser-focused on economic data releases and their impact on the wider market. This high inflation continues to act as the catalyst for short-term volatility, similar to what we have seen throughout the year. In local currency terms, the US sharemarket finished the month down 9.2%, while Europe dropped over 6%. The Australian sharemarket struggled, dropping 6%, while the New Zealand sharemarket fell by 4.5%, however, finished with a 2.3% gain for the September quarter.
The US dollar continued its historic rise in September, hitting new records. The Federal Reserve’s steep interest rate increases and the relative health of the US economy have caused investors to flood into the US dollar, driving the value up and sending other currencies down. The New Zealand dollar declined 6.5% against the USD in September, while in the UK, the sterling dropped to a 30-year low during the month, finishing 4% down relative to the USD.
The strengthening of the US dollar relative to the New Zealand dollar is largely supportive for our clients, with the gains associated with holding US dollar denominated investments in September helping to provide some ballast in otherwise challenging markets. Along with this, AMP’s decision not to include property and infrastructure in our AMP-branded diversified funds proved beneficial in September, with global listed property and listed infrastructure finishing the month as the worst performing asset classes we monitor.

Central banks reiterate stance on monetary policy for the back end of 2022

Central banks around the globe reinforced that their primary focus is on lowering inflation, and that they remain committed to raising interest rates until they achieve success. The US Federal Reserve is on its fastest interest rate hiking cycle since the early 1980s, which now sees the Fed funds rate expected to rise to 4.6% by the end of 2023 – a significant increase from earlier in the year.
We have spoken in our updates about the possibility of mistakes being made by policymakers, central banks, and Governments as the world adjusts to the post-covid era. An example of this was the UK Government announcing a program of tax cuts and investment incentives for businesses, which would see the top income tax rate be abolished. The sharemarket dropped following the announcement, and the Pound Sterling fell 4% on the day to reach its lowest level since 1985. The Bank of England was then required to intervene in an attempt to stabilise the bond market after yields reached their highest levels in over 10 years. The Government has since announced a U-turn on the tax cut after facing heavy criticism on how the economy will be impacted during a time of record inflation.
This type of disruption validates our view at the end of 2021, that looking forward, mistakes might be made as the world works through quite a fundamental shift in its economies. The economic changes occurring around the world are not without challenge, and some tough decisions are needed to bring inflation down, whilst trying to keep economies moving ahead. That’s not to mention other disruptions like the war in Ukraine and trying to predict the next move by President Putin.

Market outlook

We remain with a similar view to the past few months – market volatility will continue to challenge us for the remainder of the year at least, as the ongoing challenges that markets have dealt with throughout 2022 show no sign of letting up. We are beginning to see some business activity stall in the US and Europe, and expect this trend to continue.
Corporate earnings season in the US will begin soon, which will provide investors and markets a deeper understanding of how companies have dealt with the tough economic conditions over the past three months. Investors will also get to see how companies view their future outlook over the next year. We expect these reports to cause some market movement – but which direction, remains to be seen, as these reports could be seen as positive or negative for markets.
It is important to remember that market movements go both ways, and that over time, history tells us that markets go up more than they go down. This supports our approach of looking further ahead rather than making panicked decisions based on short-term uncertainty. Again, past experience shows that making short-term decisions can be detrimental to your long-term outcomes. By continuing to regularly contribute into your savings and investments during these periods, you are buying assets at lower prices which means you can reap the long-term benefits when markets do recover.
Although it can be unnerving seeing your investment balance move up and down, by taking a long-term perspective you will see that there have been lots of large market downturns throughout history. The most well-known over the last 30 years include the Asian Financial Crisis, the Tech Wreck, the Global Financial Crisis and the Covid-19 Pandemic. Despite the decline in the markets during these events, each time markets have recovered and reached new highs.
If you do have any questions or are concerned, please contact your adviser or AMP for a little help.

In summary…

August was a challenging month for global share markets, as short-term volatility continues to persist. Despite central banks reiterating their commitment to fighting inflation, investors are trying to understand what future markets may look like given the information we currently have. Although many global share markets performed poorly over the month, the New Zealand share market had a positive month after a corporate earnings season which fared better than expected.

August was a challenging month for Markets

August proved to be another challenging month for markets around the globe, as investors continue to grapple with an abundance of information which is causing rapid sentiment shifts.
The majority of global markets finished the month lower, as the market rally in July turned out to be short-lived. Although the positive momentum carried through into the first two weeks of August, equities slid in the back half of the month to finish in the red. In local currency terms, the US market finished 4% down, while shares in Europe dropped 5%. Australia finished the month up 1%, while the New Zealand share market also finished slightly higher, up 0.9%.
Markets are constantly trying to price in future events and expectations, which is why we see volatility in the markets over shorter time periods, with August being no exception. Investors are subjected to a constant stream of information, meaning they are continually readjusting their views on what the market might look like in the future. Trying to predict and understand the future of the market is extremely difficult, which is why people get it wrong so often. This eventuates to short-term volatility in the markets.

Central Banks remain stern on their Monetary Policy strategy

The main event on investors’ calendars for the month was the Jackson Hole Symposium, an event held in late August where dozens of central bankers, economists, and policymakers came together to discuss current economic policy and issues. Jerome Powell, the Federal Reserve (‘the Fed’) Chairman spoke at the symposium and reiterated his commitment to halting inflation, warning that he expects the Fed to continue raising rates in a way that will cause “some pain” to the U.S economy.
This was not the news investors were wanting to hear. The comments from Powell put a halt to investors' hopes that aggressive interest rate hikes may be a thing of the past. However, with US inflation running at 8.5%, which was slightly lower than expected, it is still too high for the Fed to change its path of interest rate rises.

Encouraging corporate earnings season

Corporate earnings season got underway in New Zealand during August, with many companies reporting better-than-expected numbers. One highlight was the results reported by The A2 Milk Company, which reported an annual increase in profit of 52%.
Overall, the New Zealand earnings season was better than expected, with the results helping the New Zealand share market hold up relatively well in comparison to global markets. The New Zealand share market is up 0.9% for the month, whereas the US S&P 500 index is down 4% over the same period.

Outlook

As global events continue to unfold over the next few months, we believe that the short-term volatility we have experienced recently will continue. Central Banks are still faced with record-levels of inflation, while geopolitical conflicts do not look to be ending anytime soon. Add this in with the energy crisis in Europe, and it all sums to a lot of uncertainty for markets.
Whilst we continue to report about uncertainty and volatility in markets, this period will pass. Eventually, markets will settle down and they will return to following the fundamentals that support investment and retirement planning. We cannot say when this will happen exactly, but we continue to look further out and focus on the strategies designed for our products.
It’s important in times of heightened uncertainty to remain with your investment strategy, as trying to switch or change your investments at the incorrect time can significantly impact your long-term investment outcomes. If you do have questions regarding your investments, please contact your adviser or AMP for a little help.

In summary…

• Global sharemarkets had a positive month, with bond markets also finishing in the green.
• The bounce in the markets serves as a reminder to focus on long-term investment goals.
• The economic cycle tells us that after a downturn comes a recovery.

July was a good month for markets

Sharemarkets rallied in July, posting their best month of 2022 so far. Investors and sharemarkets are typically forward-looking, where they focus on future expectations of economies and the future earnings of companies. This is why you often hear the term ‘markets have priced in’ some news or impacts like inflation, interest rate changes, or company expectations.
The July rally may turn out to be short lived, but investors, for now, seem to be more confident about the future and looking through the short-term noise. In local currency, the US sharemarket finished the month up 9.2%, European shares gained 7.6%, while both Australia and New Zealand sharemarkets ended 5.7% higher. Although developed markets performed well, emerging markets finished flat for the month as shares in China finished the month in negative territory.

Company earnings are generally pretty good

A big driver of returns in July was the beginning of corporate earnings season. This is where organisations release their company results for the past quarter, with the information providing investors with key insights into how companies are navigating and performing amidst the current market conditions. Although inflationary pressures have been mounting over the last few months, the earnings reported so far are generally better than expected. At the end of July over 50% of all companies in the S&P 500 index (the US sharemarket) have released their reports, with 78% reporting quarterly earnings above analyst expectations. That suggests company profits are holding up ok amid challenging economic conditions – that’s a good thing for markets. Earnings growth is up 7.7% for the year, due in a large part to the steep rise in commodity prices over the past six months.

Central banks continue to talk tough…

The market has also responded positively to the tough talk from central banks around the world and their actions to raise interest rates to try to bring inflation under control. Despite inflation reaching new highs, central banks remain confident they can slow inflation down and bring it back to suitable and sustained levels, however, the question of ‘if’ a recession will occur has now moved towards ‘when will it happen’. This was amplified during the month as second quarter US economic growth figures were released, showing the economy has contracted by 0.9% in the past quarter. This is the second consecutive quarter of negative GDP growth, which places the economy in a technical recession.
It is important to point out that recessions are a normal part of the economic cycle. Whilst they are the challenging phase of the cycle, recessions are always preceded by growth, and they are always followed by a recovery. What we don’t know at present is how long or deep this economic recession will be, but most commentators are not predicting it will be a particularly bad or long recession.

Outlook

We remain with the view that markets will be unsettled in the coming months as markets continue to digest the volatile economic situation around the world, and while central banks continue in their fight against taming inflation levels. Higher interest rates will impact the demand side of inflation; however, it has been the supply side that has caused most of the inflationary pressures. Opening up the supply of goods and services around the world is a bigger challenge and will likely take more time. This more than likely means that volatility will probably remain elevated in the near term.
It is important not to make reactionary decisions with your savings and investments that may impact your longer-term goals or objectives. The best advice in these times is to seek a little help from your adviser or the team at AMP before making any decisions.

In summary…

• The majority of global sharemarkets finished lower for the month • Inflation has reached levels not seen in decades, leading to more interest rate increases by central banks across the world
• We have made some changes to our diversified funds, which we believe will add some inflation resilience and additional diversification to our portfolios, and best reflect the settings required based on the long-term outlook.

What happened in markets during June?

We are now halfway through 2022, and what a challenging first six months of the year it has been… Ongoing geopolitical turmoil, record-high inflation levels and rising interest rates have culminated in a turbulent six months for all investment markets.
Investors continued to grapple with an abundance of information in June, with global sharemarkets finishing lower over the month. The end of June saw US shares record their worst first half of a year in over 50 years, but the downturn not just limited to the US. Sharemarkets in Australia, Asia, Europe, and New Zealand all finished the month in the red, while China’s sharemarket was a positive outlier, ending up in June on the back of easing Covid-related restrictions.
Talks of a recession have become more common recently, as inflation reaches levels not seen in decades. Around the world, central banks have made it very clear that their number one priority is slowing inflation and bringing it back to suitable and sustained levels. The worry on investors’ minds is how much this will dent economic growth, and will it tip the economy into recession?
On the flip side, many believe a recession will not be a deep and long one. In general, household wealth is still positive, and the rates of unemployment remain historically low – for now at least. But there are a lot of changing factors at present, which makes predicting markets a dangerous exercise over the short-term.
We have made some changes to the asset allocation of our diversified funds, which is a process we undertake every year. With inflation expected to remain high for some time and the interest rates rises, we have increased our allocation to income assets (cash and bonds) to take advantage of the higher expected long-term returns from these assets. We have also introduced some inflation protection in the form of inflation linked bonds – this should provide some inflation resilience and additional diversification to our funds.
Other changes see a decrease to New Zealand and Australian Equities while increasing exposure to global equities to capture stronger opportunities in the global marketplace.
In general, we have reduced our exposure to risk without sacrificing the expected returns outcomes for portfolios. We believe this is a sensible time to take this step given the uncertainty that exists as the global markets grapple with the abundance of mixed information about.

Outlook

Our outlook remains similar to what we have discussed in previous commentaries. The market outlook remains clouded, and we expect markets to remain unsettled in the near term as global events weigh on investor sentiment and confidence.
As we expect the uncertainty and volatility to continue in the coming few months, we like to remind investors to focus on the long-term horizon, rather than the short-term news. Negative news often takes center stage when markets are on a decline, however it is important to remind ourselves to focus on the long-term trends, where markets generally recover and go up.
In times of elevated uncertainty and lots of market ups and downs it is important to stick to an investment strategy that you know and understand. Stay in your lane and do not deviate from what you know best.
That is why at AMP we work to keep investing as simple as possible – sticking to our philosophy and not taking undue risks in uncertain times.

In summary…

• A strong rally in the final week of May saw many sharemarkets post positive returns for the month.
• The fight against inflation, which sits at levels we haven’t seen for decades, continued as central banks raised interest rates, which in turn saw an increase in mortgage rates to customers.
• The global economy and electric vehicle sales may receive a boost as China emerges from its zero-Covid policy lockdown.


What happened in markets during May?

Sharemarkets rallied strongly in the final week of May, jumping 5% to record one of the best weekly gains this year. It ended a seven-week run of consecutive declines. The weekly rise saw many sharemarkets around the world record a positive gain for the month of May. The Chinese sharemarket was a standout performer, rebounding off its April lows to gain 3.1% for the month. It’s too early to call this the bottom, but there was certainly some positive news that came out during the month.
There were positive signs that China is re-emerging from its zero-Covid policy lockdown. Reports suggest Shanghai and Beijing will start to ease lockdowns as Covid-19 cases fall. This will help boost economic growth both in China and globally. Policies have also been announced to stimulate economic activity in China, including subsiding purchases of battery-powered cars. It was also a solid reporting season in the US, with 77% of US companies outperforming their earnings estimates.
It's not all plain sailing however; some sharemarkets, including Australia and NZ, ended in negative territory for May. Volatility will remain a constant theme over the next few months as the fight to lower inflation continues. Around the world central banks either moved rates higher or made it clear that rates will rise very soon. While this impacts negatively on share prices, central banks have no alternative as their focus is to bring inflation under control, which sits at levels not seen for decades. This is flowing through to households as mortgage rates begin to rise.

Outlook

Our outlook remains relatively unchanged from previous commentaries. The market outlook remains clouded; geopolitical turmoil and rising interest rates weigh on investor sentiment while company earnings remain positive. This provides investors an abundance of information to grapple with. It is during times of elevated uncertainty and volatility that investors need to look out further and focus on long-term trends and market cycles (as we’ve said in the past, focus on the hill, not the yo-yo).
Our experiences of the past have taught us that cycles do turn, and markets do recover. Investing is like sailing; a captain needs binoculars to focus on the horizon and the long-term objective rather than getting distracted by short-term choppy conditions.

In summary…

• Sharemarkets had a tough time in April, particularly in the US.
• Other markets around the world held up better, including NZ and Australia.
• Investments into bonds suffered one of their worst months since the Global Financial Crisis.
• From a New Zealand investor perspective, the NZ dollar fell over the month, improving returns in unhedged or partially hedged investments.

What happened in markets during April?

Investors weighed up mixed news over the month, but ultimately most markets finished lower. Global sharemarkets fell as concerns of a global economic slowdown following rising interest rate expectations and Covid-19 lockdowns in China outweighed some strong US company earnings.
There was no reprieve for bonds either, with central banks seemingly in a rush to lift interest rates to fight fast-growing inflation outcomes. The US Federal Reserve continues to talk tough and, with inflation firmly in their crosshairs, markets now see the central bank sending interest rates above 3% by the end of the year. This saw fixed income markets suffer one of their worst months since the Global Financial Crisis in the late 2000’s.
The speed with which the market’s expectations of interest rate increases have moved means that the sharemarket has again been forced to play catchup. Shares in the US gave up most of March’s gains and retested January’s lows, when fears of rising interest rates first took hold. Meanwhile in Europe, investors quickly looked beyond President Macron’s re-election, with the shares in the region also ending the month lower.
Rising interest rate expectations underpinned the US dollar, which this month rose to its highest level in two years against a basket of currencies. On the back of this, the NZ dollar weakened over the month, improving returns for unhedged or partially hedged offshore investments.
Lastly, Australasian shares held up ok over the month. Both benefitting relatively from a low exposure to technology companies which came under selling pressure on the back of higher interest rate expectations.

Outlook

There is little change in our outlook from our previous commentary. The market outlook remains clouded; positive company earnings combined with geopolitical turmoil and the negatives of rising interest rates provide investors an abundance of information to grapple with. It’s during times of elevated uncertainty and volatility that investors need to look out further and focus on long-term trends and market cycles (as we’ve said in the past, focus on the hill, not the yoyo).
So, when markets and world news become rough and choppy, as investors we should take a cue from those experienced in sailing rough waters – keep your eyes focused on the horizon to give yourself a point of reference. Our experiences of the past have taught us that this is the best approach as the cycles do turn.

In summary…

• Sharemarkets recovered somewhat in March following the downturn experienced in the first two months of the year;
• Bond portfolios continue to struggle as interest rate rises in NZ and globally impact bond returns;
• Going forward, our view is that this trend will continue throughout 2022.


What happened in markets during March?

Well, thank goodness that’s over! The end of March marked the end of a tumultuous first quarter of 2022. It’s fair to say that March was a welcomed turnaround compared to the first two months of the year, which consisted of negative and confusing news-flow, causing significant share price volatility.

It was the worst quarter for sharemarkets in two-years, since the outbreak of the Covid-19 pandemic first hit sharemarkets in March 2020. While the market decline in March 2020 was caused by a single event, this quarter’s decline was due to a cacophony of bad news headlines; the Russian invasion of Ukraine, skyrocketing oil prices, and central banks preparing to aggressively raise interest rates to fight decade high levels of inflation.

At one point many markets had declined more than 10%, which in technical terms puts them in “correction” territory. Yes, markets were down over the quarter, however sharemarkets started to show signs of recovering in March – shares in the US bounced 8.8% from their March 14 low and ended the month only 5.5% from their all-time high which was on January 3, 2022. The month of March saw global sharemarkets rebound 2.3%, led higher by the US market which gained 3.7%.

Regular readers will know that we always talk about focusing on long-term investment goals rather than short-term news. Those investors who sold when sentiment and markets were at their lows over the quarter would have missed the subsequent March rebound. We’ve used this analogy before – long-term investing is like a person walking up a hill with a yo-yo. The yo-yo goes up and down, but you are still walking up the hill. Investors shouldn’t watch the yo-yo, as that goes up and down all the time. Instead, we should keep our eyes on the hill, which like markets, tends to go up over the long-term. This analogy seems very appropriate for today’s market environment.

In Australia, the sharemarket rallied 6.9%, driven higher by the information technology and energy sectors. The local NZ market, which returned 1.1%, came under pressure towards the end of the month as investors sold down the market’s largest constituent, Fisher & Paykel Healthcare. Following a stellar run off the back of the pandemic, the company announced a downgrade to forecast revenue. This occurred coincidentally the same day that the government effectively scrapped vaccine mandates.

With inflation continuing to rise rapidly, US Treasury 2-year yields moved to sit comfortably above 2% by the end of the month. At home, the RBNZ has been at the vanguard of this aggressive turn in monetary policy, raising the cash rate to a full 1% at the end of February, and it’s easy to see why as NZ inflation threatens to outrun even that in the US.

Rising interest rates both in NZ and globally have had a negative impact on bond funds this quarter.

Outlook

The market outlook remains clouded; geopolitical turmoil continues to dominate news headlines, with rising interest rates taking a backseat for now. It’s during times of elevated uncertainty and volatility that investors need to look out further and focus on long-term plans and objectives (the yo-yo and the hill). For shares, history tells us that there is generally a bounce-back and recovery after the market digests a shock, and this is what we’ve seen in March.

One thing we can be sure of is that the period ahead won’t be plain sailing. The events of the past few months have heralded a sea change in geopolitics, economics and the push for energy security in Western Europe. This may suggest further volatility is ahead for growth assets.

In summary…

Share markets fell for the second straight month as Russia mounted a full-scale attack on Ukraine. This conflict is heart-breaking to watch, and our thoughts and minds are with those who are impacted by the violence that is unfolding.
While we only held a very small investment position associated with Russian entities, at the end of February we made the decision to sell all of these holdings. This divestment is the right thing to do and reflects the views of the majority of New Zealanders who do not wish to support this tragic escalation of violence in any way. From a global investment market perspective, history tells us however that markets generally recover quickly from crisis events. This means that selling or switching funds during the initial stages of a crisis situation may result in locking in losses which could have been avoided.

In this month’s commentary we discuss:
• What has happened to markets in February;
• Lessons learnt from history when navigating wars and other crisis events;
• What happens to bond returns when interest rates rise;
• Our outlook.

What happened in markets during February?

Share markets around the world fell in February, registering their second consecutive monthly fall for the first time since 2020. Volatility within markets also rose, sparked by the Russian invasion of Ukraine.
In the immediate wake of the invasion, some markets had the largest single day movements since the start of the Covid-19 pandemic in March 2020. Governments around the world have condemned the invasion, imposing strict sanctions targeting Russia’s banking system and oligarch elite. Many companies, including some of the largest in the world like Apple and General Motors, have also acted in response to the attack. The geopolitical developments have also driven the price of oil to well above US$100 per barrel for the first time since 2014.
Against this backdrop US shares declined 3.0% during February, taking their year to date decline to 8.0%. The only sector to provide a positive return was the energy sector, which benefits from the rising price of oil. European shares declined 3.0%, while UK shares ended relatively flat.
Closer to home Australasian shares offered a contrast to global markets, with the Australian shares gaining 2.1%, while New Zealand shares eked out a 0.7% increase. All told, the share market impact during February wasn’t as bad as it could have been. Yields on longer term global bonds finished the month marginally higher, although started falling towards the end of the month following the start of the Russian invasion. The US 10-year Treasury yield ended February at 1.84%, while the NZ 10-year Government Bond yield closed the month at 2.75%, up from 2.58% at the end of January.

Theme 1 – Be wary of cashing up during a crisis

First and foremost, Russia’s actions are a humanitarian disaster, which has already resulted in the loss of many lives. But when looking at the financial implications, share markets have remained more resilient than one might think in the face of the escalating conflict in Ukraine – albeit there is increased volatility.
Firstly, the conflict will likely see central banks back away from aggressively raising interest rates, which is favourable for shares. In fact, the US Fed chair has stated that “we will proceed (with interest rate increases) but we will proceed carefully as we learn more about the implications of the Ukraine war.”
Secondly, history tells us that markets often recover quickly after an initial sharp drop. Ned Davis Research analysed the most significant political/economic crises over six decades. The average return of the Dow Jones Industrial Average (DJIA) six months after these crises was +2.3%. While performing better than the historical averages, the DJIA followed a similar pattern following the September 11 terrorist attacks:
Chart image
What this look back at history shows us is that once markets and investors come to grips with a shock event like a war or a terrorist attack, a rebound generally follows.

Theme 2 – What happens to bonds when interest rates rise?

Until the Russian invasion pulled the handbrake somewhat, interest rates were on the march higher. Central banks around the world had become more aggressive about raising interest rates to fight the high levels of inflation. This introduces a key risk when investing in bonds – interest rate risk. While bonds are often described as “defensive investments” they are not risk free and their values can fluctuate until the bond matures.
Interest rate risk is the risk that “a rise in interest rates causes the price of a bond to fall”. This is foreign territory to many investors who have lived through the recent prolonged period of falling interest rates.
Interest rates and bond prices generally move in the opposite direction. This means when interest rates go up, the value of a bond is likely to fall (and vice versa). This can deliver negative returns from bonds over the short to medium term.
It is important to remember that while rising interest rates may dampen returns for bonds in a portfolio, bonds do offer essential diversification benefits in a well-diversified portfolio. It is also important to remember that as interest rates rise, the yield from cash and bonds starts to gradually rise as well.

Outlook

The market outlook at present is very clouded with what is occuring in Eastern Europe. It’s during times of elevated uncertainty and volatility that investors need to look out further and focus on long-term plans and objectives.
For shares, history tells us that there is generally a bounce-back and recovery after the market digests a shock. We can’t say for sure what will happen this time, but history has often proven to be a good guide when navigating choppy waters.
Central banks will now struggle to walk what was already a precarious tightrope between growth and inflation. Despite February delivering another solid quarter of earnings results in the US, elevated levels of volatility will likely continue until investors have a clearer idea of the US Fed’s trajectory and extent to which conflict hurts economic growth in the short term.

In summary…

During January, share markets gave back their gains from the final three months of 2021, as looming interest rate rises from central banks spooked investors. From a New Zealand investor perspective, the NZ dollar fell over the month, which actually improves returns for New Zealanders in unhedged or partially hedged investments. This will offset some of the negatives for many AMP clients.
Technology shares have been one of the best performing sectors recently but were hardest hit in January as they are particularly sensitive to a sharp rise in interest rates.
Some markets were spared from the downturn, as investors looked past the Boris Johnson ‘party gate’ scandal to drive the UK market higher.
While markets were particularly volatile over the month, we must remember that market swings are a natural part of investing and important to achieving long-term growth. Which is a lovely segue into our first theme of the month

Theme 1 – Market volatility is part of investing

While a fall in share markets is to be expected after a long period of prices gains, the impacts to investors, particularly those who haven’t been investing for very long, can be unsettling. What’s important to understand is that markets go through cycles, and the ups and downs are a natural part of investing and important to achieving long-term growth. That is, you can’t have the ups without experiencing a few downs. Downturns are part of a healthy market and are the price investors pay in order to achieve long term financial gains. Downturns also prevent market participants from becoming complacent and reduces unwarranted risk taking.
Market volatility and lower prices can also present buying opportunities. Investors who regularly contribute to their AMP investment accounts will benefit from ‘dollar cost averaging’ during a downturn. This means by continuing to contribute to your investments when markets fall you are lowering the average price paid across your total investments. Compare this to shopping – if something is reduced in price you can buy more of it with the money you have in your wallet. Regular saving is no different – you end up buying more investments with your contributions when prices fall.

Theme 2 – The cost of climate-related events

Sustainable investing is a key focus of ours. The rise of climate-related disasters in 2021 highlighted the imperative to act now. We realise not only the social cost of these events, but also the financial cost.
Costs of climate-related events increased 13% from 2020 to 2021. Investors globally are recognising the significance of these costs and the role investors play in ensuring money flows to environmental solutions rather than environmental destroyers. For AMP, this means avoiding investing in companies involved in certain business practices and tilting our investments towards companies that do a better job of managing environmental, social and governance (ESG) issues.
An issue we could easily be soon facing is a trade-off between coffee and beef. As Brazil replaces more of the Amazon Rainforest with pasture, the frequency of droughts is increasing. Increasing droughts means less rainfall. This results in a weaker coffee bean harvest. If we fail to act, we may be inadvertently choosing between our morning coffee and a cheeseburger! As David Attenborough says, "we are the best problem solvers to have ever existed on Earth." We have created this issue, and it is up to us to solve it.

A bit more detail on what happened in markets during January…

It’s fair to say that investors have had a pretty rough ride so far in 2022. Share markets fell and bonds produced capital losses. However, January’s decline needs to be put into context. Yes, share markets fell, but all they did was give back the gains made in the final three months of 2021.
A rally over the final two days of January couldn’t prevent share markets recording their worst month since Covid-19 first hit global markets back in March 2020. Decade high inflation rates and what this might mean for interest rates in 2022 rattled investors. On top of this, Omicron infections continued to surge, placing strains on already fragile supply chains, while tensions built on the Russia/Ukraine border.
The US reporting season, which so far has been relatively strong, couldn’t stop the fall as the sell-off picked up pace leading up to the US Federal Reserve’s (the Fed) intertest rate announcement towards the end of the month. The Fed’s statement itself presented few surprises – no immediate change to interest rates. However, during the press conference, the Fed Chair, Jerome Powell, left little doubt that they are fully committed to bringing down inflation and would raise interest rates multiple times this year. The first interest rate rise is expected in March. This saw share markets take another leg down as bond yields rose.
Excluding currency movements, global shares fell 4.9% in January. Technology shares have been one of the best performing sectors recently but were hardest hit in January as they are particularly sensitive to rising rates. At one point the tech-heavy Nasdaq fell as much as 18% from its November highs. However, the index rallied towards the end of the month to pare its January losses back to 9%. The broader US market, as measured by the S&P500 Index fell 5.2% over the first month of the year, to lead global markets lower. Shares in Europe followed a similar pattern, down 3.0%. Emerging markets while ending lower over the period by 1.8%, outperformed its developed market peers.
It wasn’t all bad news for share markets, with investors looking past the Boris Johnson ‘party gate’ scandal to drive the market 1.1% higher over the month. The UK’s share market has a high weight to the strongly performing banking and energy shares which rose on expectations of rising interest rates and rocketing oil prices, respectively. The UK market also has a lower weight to tech stocks that did not performed well in the first month of the year.
The issues are similar all over the world, including in New Zealand; higher inflation means a more aggressive stance from central banks. The Reserve Bank of NZ has already commenced its rate hike cycle, and the latest inflation data suggests there is no reason to hit the pause button anytime soon. NZ inflation hit its highest level in 30-years as consumer prices rose 5.9%. NZ shares fell 8.7% over January, with short-term government bond yields climbing to 2.1%.

In summary…

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Regular readers of our monthly market commentary will know that we hold a relatively positive outlook for shares, whilst noting that short-term price corrections are likely. While share markets face many challenges with the potential for some of these to become more enduring, we invest for the long-term, choosing to look past market fluctuations. The ups and downs are part of investing.
Share markets performed strongly over December, with investors using November’s dip as a buying opportunity. While the domestic market rose over the month, it continues to underperform overseas markets as interest rates rise with the Reserve Bank of NZ (RBNZ) continuing its fight against inflation.

What happened in markets during December and over the year?
Share markets rebounded strongly following November’s short-term sell-off, rewarding those investors that remained focused on the hill (long-term investing), rather than the yoyo (short-term market noise). Financial news headlines over the month included:
1. A spike in market volatility following the discovery of the Omicron Covid-19 variant. This placed selling-pressure on shares, especially Covid-impacted sectors; and
2. Central bankers turning into the Grinch with interest rate hikes and reduced stimulus.
In December global share markets rebounded from an Omicron dip and took tightening actions of central banks, including reduced stimulus in the US and interest rate hikes by the Bank of England, in their stride. Global shares (as represented by the MSCI World Index) gained 4%. US shares recorded a gain of 4.5%, European shares were up 5.6%, while the UK market rose 4.6%. This capped off a banner year for global shares, up 24.7%. US shares led the way over the year, fuelled by low interest rates and economies reopening; the S&P 500 Index rallied 28.7%, recording 70 new highs along the way.
All sectors posted gains in 2021, led by energy, up a dramatic 54.6% in the US, a stunning turnaround after its 34% loss in 2020. The sector’s significant price volatility did little for investors over the past two-years, with the energy sector recording a relatively flat return over this time period. While energy rallied strongly over 2021, its relatively low weight in the Index means its contribution to the total S&P 500 Index return was relatively small. Market heavy weight, information technology on the other hand, gained 34.5% over the year and was the largest contributor to the return of the S&P 500 Index: [chart link].

NZ shares gained 2.5% over December but failed to produce the same level of returns as global peers for the year as sentiment soured for domestic investments; the S&P/NZX 50 Index fell 0.4% over the 2021 calendar year. Emerging markets (as measured by the MSCI Emerging Markets Index) gained 1.5% in December, pulling the index slightly into positive territory for the year. This is an impressive feat given that heavyweight China plummeted 22%, impacted by new government regulations and property developer issues; the two next largest markets, Taiwan and India, rallied 23.7% and 30.1% respectively.
Record levels of inflation, the removal of monetary stimulus and eventual rate hikes saw interest rates rise over the year. Domestic short-term government bond yields lifted from 0.26% at the end of 2020, to sit just under 2.0% 12-months later, while the equivalent US yield moved from 0.12% to 0.73%. The NZ dollar peaked at a shade below US$0.75c early in the year, but trended lower from there, accelerating its decline on the back of a relatively hawkish RBNZ to sit at US$0.68 at the end of the year.

Theme 1 – NZ shares fail to keep up with overseas markets
December saw the domestic share market underperform its global peers, the S&P/NZX 50 Index gained 2.5%, while global shares returned 4%. This occurrence, however, is not isolated to the past month, it has actually been a persistent theme over 2021. The return difference between the local and overseas markets over the year is eye watering. The S&P/NZX 50 Index slipped 0.4% over the calendar year, while overseas markets rallied strongly.
The S&P 500 Index in the US returned 28.7%, European stocks recorded their second-best year since 2009 with a gain of 22.5% and Australian shares jumped 17.2%. The negative return for the local market breaks a nine-year streak of positive calendar year returns.
So why has the local share market suddenly hit the wall in 2021?
1. A strong run leading up to the pandemic;
2. A relatively high weight to defensive securities; and
3. Expectations of rising interest rates.
At the end of 2020, the S&P/NZX 50 Index had produced an annual return of 17% for domestic investors, far superior to overseas markets. This is partly due to NZ’s high allocation to defensive stocks, such as utilities and property, as their bond-like qualities are sought after in a low interest rate environment. The steady stream of dividend payments acts as a bond proxy for investors wanting regular income.
The appeal of NZ’s defensive stocks, however, quickly changed in 2021 due to the expectations of rising interest rates to fight high levels of inflation. Utilities, like Contact Energy and Meridian Energy, represent just under 20% of the local market, and listed property another 9%. These are the bond proxy type of stocks that come under selling pressure when interest rates rise. By way of contrast, the percent allocation to these sectors in the domestic market is five times larger than the global market.

Theme 2 – The impact on financial markets of Covid variants
The latest significant Covid-19 variant, Omicron, caused a temporary panicked sell down in share markets around the world. Investors became concerned that current vaccines may be less effective against the new variant, meaning the potential for border closures and tighter restrictions were back on the cards.
Indeed, this has started to play out in European countries while the Chinese government has placed extensive restrictions in specific regions. China’s ‘Covid-zero’ policy is causing investors some unease as an escalation in restrictions could see factory shutdowns further increase supply constraints. An end to China’s ‘Covid-zero’ strategy is unlikely in the short-term as the country prepares to host the Winter Olympics next month.
Pandemic-impacted sectors temporarily sold-off with Omicron’s discovery, with WTI crude oil tumbling 16% and pulling energy stocks lower. Energy is a volatile sector, as listed companies can experience rapid price swings. AMP’s sustainable investment philosophy prohibits investment in fossil fuel related securities, meaning that AMP-branded funds avoid the volatility of the stocks in the energy sector. The AMP branded funds instead focus on the long-term low carbon economy and those businesses that will benefit from the changing structural environment. This sees AMP branded funds overweight sectors such as technology.
Around 50% of the global population are now fully vaccinated against Covid-19, with NZ sitting at the higher end of the spectrum. In terms of impacts on market volatility, the less wealthy countries with much lower vaccination rates are a cause for concern. The World Health Organization has warned that the unequal distribution of vaccines around the world has contributed to the emergence of new Covid-19 variants, with new variants likely to develop in these lower vaccinated countries. Any significant new variant is likely to cause investors concern, resulting in heightened market fluctuations and significant share price volatility, especially for the pandemic-impacted sectors.

Our outlook…
Our view remains relatively unchanged, share markets will trend higher but continue to experience short-term bouts of volatility and selling pressure. These pullbacks are to be expected and are part of investing. Omicron (and other variants which may follow) will cause headlines for some time and may result in increased sell downs until the full extent of its impact is known.
Omicron and China’s ‘Covid-zero’ strategy has increased the risk to both growth and global supply constraints. However, we remain focused on the hill (long-term). Omicron may disrupt growth, but it will only delay the global restart. In our view, less growth now means more growth later.
Looking through the short-term noise, even with rate hikes, interest rates are likely to remain low for the medium term. This, alongside strong company profits and a successful vaccine rollout leading to more sustained re-openings of economies, should ultimately prove supportive over the next 12-months for shares.
We expect bond yields to rise, as the market becomes more confident that the longer-term recovery in the global economy remains on track. Hence our outlook for fixed interest investments continues to remain less positive.

In summary…

In our October commentary we painted a relatively positive lookout while noting that several clouds remain on the horizon that could cause short-term noise and market volatility. That outlook still remains, albeit we’ve had the odd shower or two – not unlike our weather in recent weeks!
For most, particularly those saving for retirement, investing is a long-term game and one shouldn’t get overly concerned by the fluctuations in markets. Fluctuations in markets swing both ways and this is what generates returns for investors, so the ups and downs are needed and are part of investing. A simple analogy we like, is a figurative person walking up a hill while bouncing a yoyo. As long-term investors, we shouldn’t focus on the yoyo, as that goes up and down all the time very frequently. Instead, we should keep our eyes on the hill which is taking us to our destination.
The month of November threw up several yoyo events, and while some of these have the potential to turn into more enduring challenges, our outlook remains unchanged and positive for shares. We focus on the hill, rather than the yoyo.
Long-term themes don’t usually attract the news headlines – these are normally reserved for shorter-term ‘noise’. One of those longer-term themes is climate change, and November saw the 2021 United Nations climate change conference, otherwise known as COP26. At AMP, climate change is at the forefront of our minds and is embedded in our investment process, so we paid close attention to the headlines this conference made, so we have a few observations as one of our themes this month below.

What happened in markets during November?

Excluding currency movements, global shares (as represented by the MSCI World Index) lost ground, finishing November down 1.6%. Markets were looking to finish off the year strongly with both US and European markets hitting record highs in early November. However, the mood changed leading up to the end of November with the emergence of a new Covid-19 variant, Omicron, which gave markets a few worries.
In the US the market was down 0.7% over the month, led lower by the financials and energy sectors which both tumbled by more than 5%. Technology stocks were the leading light, gaining 4.3% over the month. European and UK share markets fell 2.5% and 2.2% respectively, while Japanese shares were down 3.7%.
But importantly from a New Zealand investor perspective, the NZ dollar (NZD) fell over the month, reversing the course from October. A falling NZD improves returns for NZ investors if global funds they’re invested in are unhedged or only partially hedged, therefore this provided some protection for these NZ investors meaning returns for November from global markets will not be as bad as those noted above.
In Australia, the market was down 0.5%, while closer to home the New Zealand share market was down 2.9% as the market reacted to the Reserve Bank’s (RBNZ) fight against inflation. The RBNZ’s interest rate rise of 0.25% was lower than many expected and provided relief to those that thought the Bank might be more aggressive. That move saw the NZ dollar move lower and local interest rates come off their highs. This resulted in a positive return for NZ fixed interest portfolios over the month.

Theme 1 – The hill or the yoyo?

There seemed to be an abundance of ‘noise’ over the month, especially as December drew closer. This gave the short-term investor plenty to contemplate, however when all was said and done, a NZ investor’s portfolio of investments was less likely to be impacted because of the fall in the value of the NZ dollar over the month.
For the yoyo watchers, the emergence of a new Covid-19 variant, Omicron, gave plenty to be concerned about. The discovery of Omicron saw market volatility spike, placing selling-pressure on Covid-impacted sectors. Concerns mounted that the current vaccines may be less effective against the new variant, meaning the potential for border closures and tighter restrictions are back on the cards.
While little is known about the new strain and its likely impact, its potential disruption on global travel brought an abrupt end to the bullish trend in energy markets and shares in general. Crude oil tanked 13% on the day of Omicron’s discovery, causing selling pressure on energy stocks. Travel and hospitality industries were also hit particularly hard.
US Fed Chair Jerome Powell added to the selling pressure on shares by suggesting that the central bank may further reduce its bond-buying activity. He also said that price pressures had spread more broadly and that the “threat of persistently higher inflation has grown”. This saw the word “transitory” removed from the lexicon, as the Fed now sees higher inflation lasting for longer.
Accelerated tapering news coupled with the potential disruption that Omicron could cause roiled markets. These twin concerns have left short-term investors at an awkward crossroad. We remain supportive of share markets over the next 12-months, choosing to focus on the longer-term drivers such as strong company profits and successful vaccine rollouts leading to more sustained re-openings. This should ultimately prove supportive for share markets.

Theme 2 – Sustainable investing to the fore at COP26 - Glasgow

One of the significant observations from the COP26 meetings in Glasgow last month, was that it appears that there is a transition from the situation where Governments were leading the change and progress, to one where companies and industries are making the most significant progress. The sentiment was that Governments need to focus on keeping up with what’s happening in the private sector and in financial markets.
This is a good outcome in many ways, as it demonstrates that companies and industries are making the changes that society and their clients demand. But on the other hand, we need Governments to keep up with the rate of innovation so they ensure the right regulatory settings are in place, and they can support through research and development funding alongside the financial markets.
Observers at COP26 remarked that the conference ‘trade fair’ was central to the gathering where companies and industry demonstrated problem solving initiatives on the challenge to decarbonise the globe. If you would like to listen to some observations from our investment partner, BlackRock, below are the links to a short podcast with Paul Bodnar (Global Head of Sustainable Investing) who was at the Glasgow meetings:

• Apple Podcasts
• Spotify Podcasts
• Google Podcasts

Our outlook…

Our view is that share markets will likely stabilise but continue to experience bouts of volatility and selling pressure. As we always say, these pullbacks are to be expected and are part of investing. Omicron (and other variants that are likely to follow) will cause headlines for some time and will result in an increased frequency of sell downs until the full extent of its impact is known. This is still weeks away, so we might be in for a bumpy ride leading up to Christmas.
But looking through the short-term noise, even with tapering and eventual rate hikes, interest rates are expected to remain low for the medium term. This, alongside strong company profits and a successful vaccine rollout leading to more sustained re-openings of economies, should ultimately prove supportive over the next 12-months for shares.
Even though US and European interest rate rises are still a way off, we expect bond yields to rise, as the market becomes more confident that the longer-term recovery in the global economy remains on track. Hence our outlook for fixed interest investments continues to remain less positive.

And always remember, watch the hill, not the yoyo.

In summary…

Four weeks can be a long time in financial markets. A month ago, we wrote about share markets being down in September – the worst month since the panicked Covid-19 induced selloff in March 2020.

A month on, markets have recovered, wiping out September’s losses and now sit again at or near record highs. Have all the challenges been washed away? We think not, but market participants are latching onto good news stories rather than any issues that may dampen sentiment.

This is an important reminder that markets fluctuate, and we shouldn’t get overly concerned about short-term returns. Investing is a long-term game.

What happened in markets during October?

Excluding currency movements, global shares (as represented by the MSCI World Index) gained 5.5% over October, led higher by the US. From a New Zealand investor perspective, the NZ dollar (NZD) rose after the Reserve Bank of New Zealand increased the Official Cash Rate. A rising NZD reduces returns for NZ investors if global funds are not hedged or partially hedged.

Wall Street wrapped up the best month of the year so far. All three major US indices, S&P 500, Nasdaq and Dow Jones finished October at record highs, with the S&P500 rallying 7.0% in the month. European stocks jumped 4.7%, led higher by the utilities and the technology sectors. In the UK, shares gained 2.1%.

Emerging markets did not fare as well, only gaining 0.9% as Brazilian shares tumbled 6.3%. Concerns in the South American country escalated around a pre-election government spending splurge and potential large interest rate hikes needed to curb rampant inflation. Towards the end of the month Brazil’s central bank announced its biggest interest rate rise in nearly two decades, a hike of 1.5%, leaving the country’s benchmark interest rate at 7.75%.

In Australia, shares fell 0.1%, while closer to home the NZX50 was down 1.3% as the Reserve Bank hiked interest rates as inflation hit decade high levels. The impact of this increase in interest rates produced a negative return for NZ fixed interest portfolios over the month.

We came across this interesting chart which shows October share market returns across the world. The deeper blue colours show strong returns, whereas the yellow/gold returns represent negative returns.

Market Theme 1 – Central Banks and Interest Rates

Interest rates continued to rise over the month, which generally presents a short-term negative for fixed interest portfolios. European markets are now pricing in rate rises despite the central bank’s guidance to the contrary, with the European Central Bank (ECB) maintaining the view that inflation is transitory. The ECB kept rates unchanged as expected but confirmed the monthly pace of bond buying will slow in line with guidance and that the pandemic emergency purchase programme will end next March. 10-year German bunds rose 0.1% over the month.

In the US, the minutes from the Federal Reserve’s September meeting suggests it could begin reducing the pace of its monthly asset purchases as soon as mid-November. The 10-year US Treasury bond ended 0.03% higher over October.

While most central banks around the world have begun or are planning to remove stimulus packages or tapering bond purchases, very few have started hiking interest rates. The Reserve Bank of New Zealand (RBNZ) is part of that select group, leading the way in the tightening cycle. After erring on the side of caution in August, the RBNZ hit the lift-off button at the beginning of October and hiked the Official Cash Rate (OCR) by 0.25% to 0.50%. This was the first time the OCR has been hiked since July 2014. The rate hike was later justified as inflation came in at 4.9%, surprising the market to the upside. This saw both short and long-term government bond yields rise, with the NZ 10-year Government bond breaking through the 2.0% level for the first time since 2019, gaining 0.53% during the month to end at 2.57%.

Market Theme 2 – Is the Covid-era similar to the 1970’s?

The latest print of US economic growth showed a surprisingly sharp slowdown, caused by a large drop in consumption as the US government ended its Covid stimulus payments.

The US third-quarter GDP came in at +2.0%, the slowest gain since the pandemic-era recovery, and well down from the 6.7% achieved in the previous quarter. Some are questioning whether the growth slowdown coming at the same time as inflation remains red hot, is a sign that stagflation (a period of slow economic growth, relatively high unemployment and high inflation) and whether a period of share market turmoil like the 1970s is around the corner. In the early-mid 1970s the Dow Jones Industrial Average index lost over 45% of its value, while the worst was felt in the UK with the market declining 73%.

The view from our investment partner BlackRock is that they do not believe we are about to experience the 1970s all over again. The world’s largest investment manager points to the current pickup in inflation being driven by the economic restart, not rising energy prices as in the 1970s.

They point to 3 reasons why:
1. Supply capacity has been slow to come back online, resulting in bottlenecks and price pressures;
2. BlackRock believes growth still has room to run as the global economies continue to open up, and border constraints loosen. Supply will eventually rise to meet demand, instead of the 1970s experience where demand fell to meet supply;
3. Resurgent activity is currently increasing demand for oil and driving prices higher. Again, this is the opposite of the 1970s, when higher oil prices harmed economic activity.

Our outlook…

While shares have regained positive momentum, they remain vunerable to short-term volatility.

The risks of indebted Chinese property development company Evergrande could further sour sentiment, the energy crisis in Europe and China is still to play out, central banks will start tapering soon and economies are still impacted by a raft of Covid-19 issues.

But looking through the short-term noise, even with tapering and eventual rate hikes, interest rates will remain low for the medium term. This, alongside strong company profits and a successful vaccine rollout leading to more sustained re-openings of economies, should ultimately prove supportive over the next 12-months for shares.

Even though US and European rate hikes are still a way off, we expect bond yields to continue to rise, as the market becomes more confident that the recovery in the global economy remains on track. Hence our outlook for fixed interest investments continues to remain less positive.

In summary…

In our monthly commentary for August, we opined that equities remain vulnerable to a short-term correction for several reasons:

• We are approaching the seasonally weak months of September and October;
• Delta infection rates continue to rise around the world;
• Supply constraints increase, which typically means costs will rise; and
• Central banks could soon start reducing the stimulus they are providing economies.

So, following seven consecutive months of positive gains, the writing was on the wall for a weaker September. With the odd flurry of resistance, share markets declined during the month and volatility spiked higher.

September is historically the weakest month of the year for markets, with an average decline over the past few decades of 0.55%. In fact, it is so renowned it has been coined the September effect, so we should take this in our stride as investors.

What all investors should keep in mind is that markets do not go up in a straight line, and pressure release periods are needed in order to sustain a market rally. This was the case 12-months ago, where markets declined 2.9% in September 2020. Following that pressure release, renewed buying in November and December saw the MSCI World Index rally 12.4% in final quarter of 2020. We aren’t in a position to forecast the same will happen this year, but it is important to remember to expect the ups and downs.

What happened in markets during September?

Overall, global equities fell 3.6% - the worst month since the panicked selling of March 2020. The fall was broad-based with only one sector recording a positive return, energy. We discuss the energy sector more in our next section.

The US market ended the month down 4.6%, while European stocks fared relatively better, falling only 3.1%. Australian shares finished 2.7% lower while emerging markets declined 2.8%. New Zealand shares on the other hand bucked the trend (again), finishing September 0.4% higher. After rallying strongly in August following a takeover offer, Z Energy lost some of its get-up-and-go during September, declining 2.5% to underperform the market. It’s important to note that the AMP New Zealand branded funds do not invest into Z Energy as the company does not align with our sustainable investment philosophy.

US Treasury yields continued to climb higher and the New Zealand 10-year Government bond yield has also lifted. Rising yields add to the selling pressure on share markets.

Theme 1 – volatility in energy prices…

Shares in energy-related companies rose over the month as Brent Oil traded near a three-year high as demand picked up following the withdrawal of Covid-19 restrictions, while supply remains constrained. Energy is a volatile sector, and listed companies can experience rapid price swings. Overall, the energy sector rally had little impact on the broad market as the sector only accounts for 3.2% of the MSCI World Index – the most common reference point for global shares performance.

AMP New Zealand’s sustainable investment philosophy prohibits AMP-branded funds from investing in fossil fuel related companies, meaning our funds do not experience the price volatility caused by the energy sector. Our funds instead focus on the long-term transition to a low carbon economy, and particularly businesses that will benefit from the changing structural environment resulting from the global focus on climate change. This sees our funds favour other sectors such as technology.

One consequence of shifting societal preferences is that the price investors are willing to pay for assets perceived to be sustainable is changing, driving differentiated returns. Capital flows toward sustainable assets are a symptom of this phenomenon.

In our view, corporate behaviour is likely to adapt to policy and regulatory changes introduced to combat climate change. As a result, profitability across sectors will be impacted, with sectoral winners and losers. BlackRock have estimated the annualised five-year return differential between the US energy and technology sectors to be 7%. This is why AMP-branded funds are tilted towards technology stocks and a cleaner greener environment.

Total return impact from the shift to a green economy over 5 years:
Source: BlackRock Investment Institute, February 2021

Theme 2 – the inflation story (again)

It feels like we talk about inflation every month in these commentaries… It is probably topical because inflation has not troubled the financial markets since the 1980’s.
NZ inflation rate, 1960-2020 (source: MacroTrends)
US inflation rate, 1960-2020 (source: MacroTrends)


Despite a slightly softer US reading in August, inflation continues to remain high around the world. This has seen the tone of central banks become slightly more hawkish. In the US the expectation for the first interest rate hike has been brought forward to next year, and tapering could start as early as November. While in Europe, the European Central Bank (ECB) kept its monetary policy unchanged, announcing however a slowdown in the net asset purchases under its pandemic emergency purchase programme.

Domestically, all eyes have been on the Reserve Bank of New Zealand (RBNZ) since they were forced to maintain the Official Cash Rate (OCR) at 0.25% at its August meeting following the Delta outbreak and subsequent level 4 restrictions. With restrictions slowly being lifted and a much stronger June quarter GDP growth number of +2.8%, has all but sealed in a rate hike at the next RBNZ meeting on 6 October. Leading up to the meeting, banks increased their mortgage lending rates as the expectations of a rate hike were baked into the numbers. The RBNZ didn’t disappoint this time, raising the OCR by 0.25% to 0.50%.

Our outlook…

Our view is that share markets will likely stabilise, but risks remain for short-term pullbacks. These pullbacks are to be expected after a sustained period of positive returns.

On the side of the challenges are:
• Chinese property markets following the Evergrande troubles;
• The energy crisis in Europe and China is still to play out;
• Central banks will start tapering soon.

On the side of the positive is:
• Even with tapering and eventual rate hikes, interest rates will remain low for the medium term;
• Companies continue to report strong profits;
• The successful vaccine rollout is leading to more sustained re-openings of borders and economies.

On balance we still favour the positive outlook over the next 12-months for share markets.
Bond yields are expected to continue their rising trend, as the market becomes more confident that the recovery in the global economy remains on track.
Hence our outlook for fixed interest investments is still less positive.

We welcome your feedback on these monthly commentaries and whether you find them interesting to read and useful as an investor with AMP Wealth Management.

Thank you.

In summary…

Once again, we can happily write about markets going up, which has produced positive outcomes for investors. Long may this continue, but as we know, an expectation that this will continue forever is totally unrealistic. But we will continue to enjoy this run for as long as it continues.In this month’s report, we talk about:
• Our usual summary of markets;
• The Reserve Bank’s plans were ‘Delta-blow’;
• The fastest market recovery since World War 2.


What happened in markets during August?

The month of August is often associated with elevated share market volatility as we approach the seasonally weak months of September and October. This year saw no respite with a variety of factors giving investors legitimate reason to pause. Positive sentiment however ultimately outweighed concerns, with investors more than happy to use any market pullback as buying opportunities.
Share markets around the world posted strong gains, with many hitting all-time record highs. The MSCI World Index returned 2.7%. The US market gained 3.0%, while European stocks gained 2.0%.
Chinese shares recovered in August after coming under heavy selling pressure in July as investors became increasingly nervous over the regulatory crackdown on technology companies.
The New Zealand share market was a shining light, returning 5.0%, spurred on by the Reserve Bank of New Zealand (RBNZ) who reluctantly kept rates on hold.
In fixed interest, the yield on the benchmark US 10-year Treasury increased by 0.06% in August and rose from a mid-month low of 1.17% to close the period at 1.30%. The yield on the NZ Government Bond Index climbed 0.25% for the month, ending at 1.52%.
Emerging markets did not perform as well as their developed counterparts. While Chinese stocks did recover, on the back of strong company earnings, the regulatory crackdown is hitting investors’ confidence. The situation in Afghanistan is unfolding rapidly and has the potential to rattle the confidence of investors. Market concerns around this event focus mainly on unsettled investor confidence spilling into other markets around the world and how global leaders will react.
As we saw this month with the RBNZ, Covid-19 remains the talking point for central banks. New cases in Europe, the UK and Canada have picked-up, but importantly hospitalisations and deaths remain low highlighting the success of the vaccine rollout. Israel appears to be an exception with a highly vaccinated population but increasing numbers of vaccinated people falling seriously ill. As a result, Israel is ramping up booster shots. While New Zealand’s daily vaccination rate has picked up recently, we remain at relatively low vaccination levels compared to most other countries. This will likely slow the reopening of our borders.

Theme 1 – The Reserve Bank’s plans were ‘Delta-blow’…

Economic data including a high inflation reading of 3.3% and the strong domestic labour market all but put to rest any lingering doubts that the RBNZ would lift the Official Cash Rate (OCR) in August. The question became not if, but by how much. Labour market data showed the unemployment rate falling to 4%, significantly below economists’ expectations of a smaller drop from 4.7% to 4.4%. There was also broad-based growth in employment and wages, with the latter increasing from 1.6% to 2.1% according to Statistics NZ.
However, two days before the RBNZ was due to announce its OCR decision, the emergence of the Covid-19 Delta variant in the community and consequent introduction of Level-4 restrictions introduced another factor for the Bank to juggle. Given the heightened uncertainty around the lockdown, the RBNZ decided to leave the OCR unchanged at 0.25%.
The Bank made it very clear however that it would have increased the OCR at this meeting were it not for these last-minute developments. The Bank’s next meeting is early October, where it will get another opportunity to pull the handbrake on the economy.

Theme 2 – Fastest market recovery since WW2…

August saw the seventh consecutive monthly gain in the S&P 500 Index, the broad US market index, and also marked the doubling of the Index off its Covid-19 lows. The market bottomed on March 23rd 2020, so from here the S&P 500 Index took only 354 trading days to rally 100%. According to CNBC analysis, this makes it the fastest bull-market doubling off a low since World War II. History tells us that on average it takes a bull market more than 1,000 trading days to achieve this milestone.
What does this tell us? It shows us that the impact of Covid-19 on investment markets is quite possibly like any other market event in our recent history. Whilst the pandemic, and its associated restrictions, hit markets severely in February and March 2020, the markets were not structurally or fundamentally in a fragile state. The unprecedented level of stimulus steadied the economic ship, enabling it to navigate this challenging period. So, when the world’s economies started to recover, the vaccines were created and subsequently rolled out, the economic growth that followed has inspired the rise in markets. The challenge now becomes how does the market react to the reduction of this stimulus and the eventual rise in interest rates.



Our outlook…

Equities remain vulnerable to a short-term correction for several reasons:
1. We are approaching the seasonally weak months of September and October;
2. Delta infection rates continue to rise around the world;
3. Supply constraints increase, which typically means costs will rise; and
4. Central banks could soon start reducing the stimulus they are providing economies.
But looking through the short-term noise, even with reduced economic stimulus and eventual interest rate hikes, rates will remain low for the medium term. This, alongside strong company profits and a successful vaccine rollout leading to more sustained re-openings, should ultimately prove supportive over the next 12-months for shares.
Bond yields are expected to continue their rising trend, as the market becomes more confident that the recovery in the global economy remains on track. Hence our outlook for fixed interest investments is a lot less positive.

In summary…

Markets continued their strong run through the month of July. Equity markets in developed countries generally ended the month of July in positive territory, with many hitting new record highs. Equities rallied despite concerns about a possible economic slowdown, higher inflation readings and rampant Covid-19 variants. While equity markets ended the month higher, it wasn’t always plain sailing…

In our report this month, we cover two key themes:
- Covid-19 cases increase, but hospitalisation and death rates don’t; and
- Inflation rates go up, but Central Banks don’t immediately react.

What happened in markets during July?

Markets traded lower at times during the month, but investors seemed more than happy to ‘buy the dip’ when the opportunity presented itself. This supported the market when pockets of negativity emerged.
But there has been plenty of good news for investors to latch onto providing solid support for the market rally, including dovish guidance by central banks, economies reopening, and the vaccination rollout success and efficacy rates. These factors combined with a strong start to the US corporate earnings season, which has seen 88% of companies beat market expectations. Markets like it when companies beat expectations, so this ensured investor sentiment remained positive.

Global equities ended the month up 1.8%. This was led by the US which ended the month 2.4% higher – its sixth consecutive monthly gain. US equities have now gained 18% year-to-date. European equities also ended up 1.2%, slightly less than their US counterparts. Emerging markets lost ground (-6.7%) as shares in China came under heavy selling pressure as its Government continues to extend its crackdown on technology companies.

Once again, the New Zealand market was the laggard – down 0.5% – due to a rise in interest rates caused by the Reserve Bank’s message that it was discontinuing its bond buying programme a year earlier than scheduled.

Theme 1 – Covid-19 cases…

Covid-19 continues to be a dominate theme influencing markets. The highly contagious Delta variant now accounts for more than 80% of new cases in the US. Closer to home, we are seeing the impact through the lockdowns required in Australia and the battle for containment underway in Fiji.
Globally, 57% of people in developed countries have received one vaccination dose, and 45% have received two doses. Many countries continue to remove restrictions as their vaccination rate increases. England is the perfect example with “Freedom Day” lifting nearly all remaining limitations on public life. This comes at a time when infection rates are ticking up as the new Delta variant takes hold.
While the high vaccination rate may not keep a lid on the case numbers, the data (so far), is showing it is keeping the more serious hospitalisation level and death rates down. Unfortunately, some countries with lower vaccination rates are still struggling – with the likes of South Africa, Malaysia, Indonesia and Russia currently experiencing increased case numbers leading to a significant pickup in deaths.
New Zealand sits somewhere in the middle, with a low vaccination rate. Given the slow domestic vaccination rollout, our borders are likely to remain closed longer than other developed countries.

Theme 2 – Inflation is up…

Higher inflation readings around the world gave investors reason for concern, but any lingering doubts were put to rest by dovish rhetoric from the central banks of key economic markets.
Economic data out over the month was mixed, but mainly on the strong side. The European Central Bank (ECB) left monetary policy unchanged but introduced more flexibility around its inflation target. The ECB has moved away from a target of “close to, but below 2%”, to one that allows a deviation, above or below, the 2% target.
The US Federal Reserve remained firm in its view that the higher inflation reading of 5.4% is transitory. The data provides weight to this assessment – just five pandemic affected items covering 12% of core inflation, drove 75% of the increase. The 45% increase in used car prices accounted for more than a third of the rise in core inflation, which contributed to the rise in overall inflation.
With US & European central banks remaining cautious, interest rate increases outside of New Zealand do not look likely anytime soon, and this saw the US 10-year Treasury yield fall to 1.24% from 1.44%.
In New Zealand inflation rose at its highest rate in the second quarter in almost a decade, with the annual rate of 3.3% sitting above the Reserve Bank of New Zealand’s (RBNZ) target inflation band of 1-3%.
The domestic labour market remains tight with job ads breaking record levels. The strong economic data saw the RBNZ make an unexpected move by stopping its bond buying programme a year earlier than scheduled. This hawkish message was poorly received by the market with short-term interest rates pushing higher and the S&P/NZX 50 Index finishing the month -0.5% in the red. Given the tight labour conditions and surge in inflation, many market commentators are now forecasting the RBNZ to hike the Official Cash Rate in August.

Our outlook…

There is a risk that equities are entering a period of weakness as Delta variant infection rates soar and the seasonally weak months of September and October approach.
However, risk assets (equities/shares) are still well supported with low interest rates, the re-opening of economies, dovish central banks and strong company profits. While bond yields have pulled back recently, this appears against a rising trend so may prove to be temporary.

June: another good month for the markets

In summary…
June was another good month for markets. Why? Two main reasons:

1. The ongoing successful roll-out of the COVID-19 vaccine around the world; and
2. The increase in inflation, we talked about last month, is believed to be temporary and so there was a focus on more positive data.
However, the question facing everyone in the markets now is whether this will continue, or will the recovery that we have experienced over the past 12-months start running into some headwinds? In our view, this is a time when we need to focus on longer-term fundamentals and try and block out ‘short-term noise’.

June results…

Global sharemarkets rose 2.3% in June. The US (+2.2%), Australia (+2.7%) and New Zealand (+2.3%) sharemarkets were among the best performing. The Japanese and Chinese markets fell -0.2% and -0.7% respectively. Emerging markets underperformed developed markets returning +0.6% over the month. Although June witnessed the outperformance of global property relative to the broader equity market, infrastructure and utilities continued to underperform.
New Zealand (finally!) enjoyed a good month, albeit this comes after a period of underperformance. Nevertheless, it was a healthy result given domestic interest rates increased over the month, except for very longer-dated bonds which enjoyed a fall in yield.
On a year-to-date basis, signalling halfway through the calendar year, global sharemarkets are 14.2% higher and the US and Eurozone have outperformed the rest of the world. New Zealand is one of the few global sharemarkets to have fallen in value since 31 December 2020, down -3.3%. Global sharemarkets have returned 36.9% over the last twelve months.

The detail…

Global equities continued to climb higher in June despite another bigger-than-expected US inflation number and a signal from the US Federal Reserve (the Fed) they may commence raising interest rates in 2023. Global markets brushed aside these concerns as the month progressed as inflation fears faded, there was an increased focus on expectations that central bank policy will remain accommodative for some time, a continuation of positive economic data, and the ongoing successful roll-out of the COVID-19 vaccine around the world.
Despite falling 1.3% after the Fed’s announcement in mid-June, US equities again reached historical highs in June. The Fed spooked markets by indicating they may raise interest rates twice in 2023. They are also moving toward scaling back the rate at which they are purchasing securities (tapering), which is increasingly likely to start early next year.
However, soothing words following the Fed’s announcement, particularly from the Chairman, that the current spike in inflation is temporary and full employment is some time away, eased market concerns and they focused on more positive data.
The positive data includes elevated business conditions in the US, Australia, and across Europe, positive manufacturing surveys, and improving labour markets. In addition, the COVID-19 vaccine rollout continues successfully. So far, 23% of people globally have had at least one dose of vaccine (this compares to 11.0% last month). Canada is now at 70%, the UK at 68%, the US at 55%, Europe at 48% and Australia is at 27%. The success of the vaccines continues to be evident in low new cases, hospitalisations and deaths in countries with high levels of vaccination.

Our favourite chart showing vaccination rates illustrates this.
(Source: BlackRock Investment Institute. Our World In Data. Jul 14, 2021. Note: The chart above shows the number of COVID-19 vaccination doses administered per 100 people within a given population. It compares the number of people who have received at least one dose with the number full vaccinated -- usually two doses are required. Values do not include participants in the vaccine arm of clinical trials.)

In relation to inflation, US core inflation puffed up 3.8% for the year – its highest level since 1992. The key drivers of the spike in inflation are the base effects as the deflationary numbers drop out from last year, higher commodity prices, and COVID-19 impacts and disruptions as the US economy opens. Just five groups with a weight of about 14% in the core CPI accounted for more than 0.4 percentage points of the 0.7% monthly increase in core inflation. This included vehicle rentals up 12%, used cars up another 7%, and airfares also up another 7%.
The increase in prices is not broad-based and is increasingly seen as transitory (temporary), with the upward pressure on some price increases fading over time. The median CPI which provides a better guide to underlying inflation rose just 0.26% in May or 2.1% year-on-year and indicates the rise in inflation is not broad based. As noted earlier, sometimes we need to block out short-term noise and focus on fundamentals when investing.

What’s ahead?

We remain fundamentally positive for the outlook through the rest of the year. There is no shortage of challenges though – particularly with some parts of the world grappling with the Delta variant of COVID-19. As we see with Sydney, it does not take much to fall back into significant disruption.
So, we continue to watch the vaccine roll-out, the economic recovery from last year, inflation, plus the Delta variant. In our view these are short-term issues, but if any become more prevalent and impact the long-term picture, the positive sentiment will become challenged.

As always, have a plan, stick to it, and get advice!

In summary…

To use a common sporting analogy, May was a month of two halves for global markets.

In the first part of the month, there was some uncertainty and market volatility due to:
• Higher than expected inflation statistics in the US; which in turn lead to
• Uncertainty on when the US Federal Reserve would change their policy settings; and
• Sharp falls in cryptocurrencies – particularly Bitcoin – which are not in our funds but the market seemed to take an interest in.

However, in the second half of the month, inflation fears faded as investors took guidance from central banks who continue to view inflationary pressures as temporary. Given this, markets were able to refocus on positive economic data, economies reopening and the continued roll-out of the Covid-19 vaccine – all positive factors.

So all in all global sharemarkets rose 1.0% in May, led higher by the European markets (+1.6%). Emerging markets finished May 1.2% higher lead by the Chinese and Indian markets, returning 4.9% and 5.8% respectively over the month. Australia (+2.3%) was also a strong performing market.

The New Zealand sharemarket continues to lag the rest of the world, as it has for much of 2021, falling 3.2%. There were two key contributors to this – another profit downgrade by A2 Milk soured sentiment, and Fisher & Paykel Healthcare missed market profit forecasts. But rising interest rates also weighed on the local market.

Theme of the month – Inflation…

The Millennials and the Gen Y generation will ask “what’s inflation?”. Some Gen X’ers will remember the word from their early years, but the Baby Boomers will remember inflation well.

Are we about to see inflation become a thing again? Some say yes, and others say it is a blip working through the system as the world economies restart after Covid-related impacts.

But rattling global markets during the month of May was a stronger than expected US inflation number. Core US inflation rose 0.9% in April versus expectations of 0.4%.

Annual inflation rose to 3.0% compared to 2.3% anticipated. Market’s don’t typically respond well to surprises…

Although higher inflation was expected due to rising commodity prices and supply chain bottlenecks, Covid related impacts are evident in these rising inflation figures. Covid sensitive sectors, such as hotel rates and airline tickets are rebounding as the US economy continues to open up. In addition, disruptions from Covid-19 have resulted in price increases. This was evident in April with used car prices increasing 10% due to a shortage of new cars.

Global central banks are expected to look through some of the pick-up in inflation, particularly those attributed to Covid-19 related impacts. However, the risk of higher inflation is growing, and financial markets are likely to be ultra-sensitive to any new data pointing to higher than anticipated levels in inflation.

Rising inflationary pressures and better-than-expected economic activity have placed the spotlight on central banks as to when they will adjust their policy settings of ultra-low interest rates and reducing the massive stimulus packages. Several central banks have started to indicate the period of very low interest rates is coming to an end – the Reserve Bank of New Zealand (RBNZ) included.

Although the RBNZ left policy settings unchanged in May as expected, they did provide guidance that the Official Cash Rate (OCR) would start moving higher in the third quarter of 2022. These forecasts reflect an improved outlook for the New Zealand economy by the RBNZ. A growing economy is a factor that could push inflation higher, which ultimately will mean higher interest rates as the RBNZ tries to keep inflation in check.

Final thoughts?

Markets have continued to be positive for investors and savers. Since the start of the year global sharemarkets are 11.6% higher, and in the past 12-months, they are 36.9% higher.

Companies around the world are reporting better-than-expected earnings, which is a good thing. The economies continue to open up due to a successful Covid-19 vaccine roll-out, so the outlook remains positive. For example, European business confidence is at its highest level since 2018.

So far, around 11% of the global population have received one dose of the Covid-19 vaccine. Within developed countries the UK is leading the charge at 58%, the US is at 51% and Europe at 36%. New Zealand and Australia (8%) are well behind. The success of the vaccines continues to be evident in Israel, the UK and the US which have seen a collapse in new cases, hospitalisations and deaths.

Fortunately, the cases of coronavirus have fallen globally, primarily reflecting an improved situation in India.

Global sharemarkets performed strongly in April, continuing the positive sentiment that has existed for most of 2021 so far. The three key themes for the continued strong performance are:

1. The continued roll-out of the Covid-19 vaccine across the world;
2. Better than expected results from US companies as many announced their annual results over April;
3. An improved economic outlook – supported by a view that interest rates are expected to remain low for some time, and also the new government spending initiatives announced by President Biden in the United States.

In April, Global sharemarkets rose 4.0% across the board. This was led by the United States market which returned 5.3% for the month. Australia (+4.3%) and the UK (+3.8%) also performed well, while Europe (+2.5%) delivered a solid result. The New Zealand sharemarket lagged the rest of the world, as it has for much of 2021, returning 1.4% over the month. Likewise, emerging markets continued to trail developed markets, returning 0.04% for New Zealand investors.

April 2021 is a year on from when markets suffered when the Covid-19 virus negatively impacted investment returns. As we look back a year on from the near market lows this time last year, global sharemarkets have returned 41.1% (currency hedged) over the last year. Again, the US market has been one of the better performing markets, generating returns of 45.7% over the last twelve months. Remember, this is relative to a low starting point, but it does show the positive market recovery from the lows in 2020.

Theme 1 – Covid-19 vaccine…
So far, around 8% of the global population has received one dose of the vaccine. Within developed countries the UK is leading the charge at 51%, the US is at 44% and Europe is at 23%. New Zealand and Australia (8%) are well behind. Unfortunately, the number of cases of coronavirus has risen globally, which predominately reflects the devastating developments in India over the last two weeks of April.

Although economic activity contracted in Europe during the first part of this year, the economies of Europe are expected to return to positive growth over the months ahead as the rollout of the Covid-19 vaccine continues. Europe is technically in a recession again, because economic growth also contracted over the last three months of 2020.

Theme 2 – Better US results…
US shares were propelled higher in April primarily by better-than-expected company earnings. Of the 60% of S&P 500 companies that have reported their earnings, 87% have been above expectations by an average of 23%. US economic data also remains very strong. Over the March quarter the US economy expanded at an impressive 6.4% annualised rate. The rate of growth in US economic activity is expected to peak later this year before slowing to a more sustainable level.

Theme 3 – An improved economic outlook…
April also witnessed further US Government spending plans. In the latest announcement, President Biden confirmed his American Families Plan, involving $1.8 trillion in spending on childcare, education, and paid leave. This will be partly funded by tax hikes, including an increase in the top income tax rate and an increase in capital gains tax rate for very high-income earners. This package, along with the $2.2 trillion American Jobs Plan (which largely targets infrastructure spending), will be spread out over the next decade. The $1.9 trillion spending package announced in February 2021 seeks to support US economic activity this year.

In somewhat negative news though, recent US inflation data is slightly stronger than expected. Core inflation has jumped to 1.65% from 1.28% a month earlier, in part reflecting weak inflation data a year ago. Although inflation is likely to increase over the medium-term, excess capacity in the global economy means the risks of an outbreak of inflation is low. Accordingly, central banks in almost all developed countries have reiterated they are a long way from increasing interest rates, including New Zealand and Australia.

Against this background, fixed income markets around the world, including New Zealand, managed to deliver a positive outcome in April, partially recovering some of the losses from earlier in the year. New Zealand and US 10-year government bond yields were trading near 1.65% at the end of the month. Commodities also performed well, rising 8.1%, with oil delivering a 9.8% return. The New Zealand dollar finished the month at 71.62 cents versus the US dollar, up from around 70.00 cents at the beginning of the month. Global Infrastructure and global property hedged to New Zealand dollars returned 3.8% and 5.7% respectively in April.

The outlook from here…
The outlook for markets remains fairly positive as the vaccine roll out gathers pace and interest rates remain low. In addition, excess savings in the US, an increase in spending by US companies, solid economic growth in China and an increase in government spending around the world, bodes well for the global economy and sharemarkets over the medium-term. Several risks remain, however, including disruptions to the Covid-19 vaccine rollout, rising coronavirus cases and a stronger than anticipated pick-up in inflation.

Global share markets increased by 4.2% in March 2021, compared to an increase of 2.7% in February 2021. The outlook for markets remains fairly positive over the medium-term as vaccine distributions are underway and global Covid-19 infections have begun to drop. There are still risks, however, as this positive outlook is anchored on timely vaccine delivery in 2021. Already there have been some hold-ups and export restrictions in Europe.

European markets increased by 6.2% for the month of March. The UK share market increased by 4.2% and the US market increased by 4.4%. Meanwhile, emerging share markets rose by 2.2% in the month.
The New Zealand share market lagged a bit but managed a 2.9% increase this month compared to last month’s decrease of -6.9%. The New Zealand 10-year government bond yields remained above 1.7% for most of March and closed off the month at 1.8%. The New Zealand government also required the Reserve Bank to consider house price inflation when setting its monetary policy.

Government bonds, both in New Zealand and internationally, remain a popular central bank tool to support economic stimulus. The Reserve Bank of New Zealand continued to keep interest rates relatively low. We expect the easy monetary policy set by New Zealand’s Reserve Bank and overseas central banks to continue for the foreseeable future. Central banks have indicated that in almost all developed economies, we are a long way from interest rate hike discussions.

We can expect the market ups and downs to continue for some time. It’s helpful to remember that KiwiSaver is an investment, and market movements are a normal part of investing. It’s important to keep your financial goals in mind when you’re thinking about investments, including your KiwiSaver account. That’s why making sure you’re in a suitable fund is important, and if you are, hang in there, as for most members KiwiSaver is a long-term investment.
One of the benefits of being with a full-service provider like AMP is that we have a team of experienced advisers who can help you make sense of what’s going on. We can also talk to you about getting a plan in place to help you get on track with your KiwiSaver – we’re here to help.

You can view returns for the AMP KiwiSaver Scheme here. You can view returns for the NZ Retirement Trust here.