Global shares
Global share markets made modest gains in the June quarter, with the MSCI ACWI Index ‒ Net returning 1.0% in unhedged New Zealand dollar (NZD) terms. Much of the gains continued to be driven by central bank activity. In the US, the Federal Reserve (Fed) left its benchmark fed funds rate on hold at a target range of between 5.25% and 5.50% throughout the period. Speaking after the Bank’s latest (June) gathering, Chairman Jerome Powell said that while inflation has eased considerably from its peak, it nonetheless remains too high, and that policymakers don’t yet have the confidence to begin lowering interest rates. However, Powell did reaffirm his belief that current monetary policy is sufficiently restrictive to achieve the Bank’s inflation goal. The Fed also signalled that it expects to cut interest rates just once this year; two less than it projected back in March. Encouragingly, the latest inflation figures showed an easing in consumer prices between April and May. At the time of writing, the market was fully priced for a first Fed rate cut in November. Elsewhere, the European Central Bank cut interest rates in early June; the Bank lowering its main refinancing rate by 0.25% (to 4.25%) after what President Christine Lagarde called a marked improvement in the region’s inflation outlook. However, the Bank gave no indication of the timing of its next move, saying only that it will continue to follow a data-dependent and meeting-by-meeting approach to determine the appropriate level and duration of restriction, and that the Bank isn’t pre-committing to a particular rate path. Meantime, both the Bank of England and the Bank of Japan left their respective benchmark policy rates unchanged. Share markets also benefited from a series of mostly positive corporate updates and strong performances across the ‘Magnificent 7’.
At the country level, the benchmark US S&P 500 Index (3.9%) and the tech-heavy NASDAQ Composite (8.3%) made good gains for the quarter, while the Dow Jones Industrial Average (-1.7%) slipped. Stocks were also higher in the UK (2.7%1 ) and Japan (1.5%2 ) but fell in Europe (-3.7%3 ) and China (-2.1% 4 ).
New Zealand shares
New Zealand shares underperformed their global counterparts in the second quarter; the local market returning -3.1%5 . Much of the decline was driven by a combination of earnings downgrades and a series of softer-than-expected domestic economic data; though we did see signs that business confidence is beginning to rise. Meanwhile, the Reserve Bank of New Zealand (RBNZ) left the official cash rate on hold at 5.50% throughout the period but warned that interest rates may need to stay higher for longer. In its latest (May) post-meeting statement, the RBNZ noted that restrictive monetary policy had reduced capacity pressures in the economy and lowered consumer price inflation, which was expected to return to the Bank’s 1-3% target range by the end of this year. However, the Bank conceded that services inflation is receding slowly, which has continued to delay anticipated interest rate cuts. Annual headline inflation currently sits at 4.0%. [Note: the RBNZ left rates on hold at 5.50% following its early July gathering.] At the sector level, consumer discretionary and materials recorded by far the biggest declines over the period, while information technology and the traditionally defensive consumer staples space made relatively strong gains.
Australian shares
Australian shares were weaker over the period, returning -1.2%6 . Contributing to the decline were expectations domestic interest rates will remain higher for longer amid stubbornly high inflation. The Reserve Bank of Australia (RBA) left the official cash rate unchanged at a 12-year high of 4.35% throughout the quarter. In its latest (June) post-meeting statement, the Bank reiterated its view that the path of interest rates that will best ensure inflation returns to target in a reasonable timeframe remains uncertain and the Bank is not ruling anything in or out. It was only in February that the Bank said the path of interest rates that will best ensure inflation returns to target in a reasonable timeframe would depend upon the data and the evolving assessment of risks, and that is not ruling anything in or out. The decision to leave rates on hold in June came despite economic data at the time that showed an acceleration in both headline and core inflation. Those stronger inflation prints had weighed on stocks as investors not only wound back their rate cut expectations but also considered the possibility that the RBA may have to raise interest rates again. Speaking after the Bank’s June gathering, Governor Michele Bullock acknowledged that officials had discussed lifting the cash rate (to 4.60%) but ultimately felt that monetary policy was restrictive enough to get inflation back to target. Stocks rallied in response to her comments as investors reduced their bets of another rate rise this year. However, stocks soon reversed direction as investors gave up any hope of a near-term rate cut following the release of the latest (monthly) inflation numbers, which showed a further acceleration in consumer prices.
Global listed property
Global listed property fell in the second quarter, returning -1.8%7 in hedged NZD terms. Contributing to the decline were higher long-term government bond yields; particularly in the US, where the yield on 10-year Treasuries rose in response to the Fed signalling fewer interest rate cuts this year. At the regional level, North America posted the biggest decline for the quarter, followed by emerging markets, Australia and Asia ex Japan. Japan and the UK were also weaker, while Continental Europe performed relatively well. In terms of sectors, US industrial, lodging and office names were amongst the worst performers, while US healthcare and residential stocks outperformed.
Global listed infrastructure
The global listed infrastructure market made good gains over the period, returning 2.5%8 in hedged NZD terms. Much of the advance was driven by strong gains in the US, which comprises a large part of the overall market. Asia ex Japan, emerging markets and Continental Europe also recorded gains, while Japan, the UK and Australia underperformed. At the sector level, electric utilities were amongst the best performers, benefiting from increasing demand for electricity within the artificial intelligence space. Energy also performed well despite lower oil prices, while airports underperformed.
Global fixed income
Global bonds edged slightly higher for the quarter, returning 0.1%9 in hedged NZD terms. Longer-term government bond yields rose (prices fell) over the period as investors continued to assess the outlook for interest rates. More broadly, bonds benefited from their traditionally defensive qualities in the face of ongoing geopolitical risks; particularly in the Middle East. Credit markets were weaker, with spreads on US and European investment-grade and high-yield debt wider for the quarter. Local currency emerging markets debt also underperformed, while hard currency emerging markets debt recorded modest gains.
New Zealand fixed income
The New Zealand bond market made modest gains over the period, returning 0.8%10. Domestic long-term government bond yields rose in sympathy with their global counterparts. However, bonds continued to benefit from their traditionally defensive characteristics amid heightened geopolitical uncertainty. The yield on New Zealand 10-year government debt closed the quarter 13 basis points higher at 4.6690%. Local credit markets were mildly positive, with spreads narrowing slightly over the period.
New Zealand dollar
The New Zealand Trade-Weighted Index11 rose 2.1% over the quarter, driven in part by some hawkish comments from the RBNZ following its May policy meeting. The currency also benefited from looser monetary policy in Europe and Canada, as well as expectations other central banks are getting closer to cutting interest rates. The NZD rose 7.6% against the Japanese yen, 2.7% against the euro and 1.5% against both the US dollar and the British pound. It fell 0.5% against the Australian dollar, where a series of hotter-than-expected inflation readings raised the prospect of another rate rise.
^ Russell Global Large Cap Index until 30 September 2018, MSCI ACWI Index ‒ Net thereafter
Note: All returns in local currencies unless otherwise stated.
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1 FTSE 100 Index
2 Tokyo Stock Exchange Tokyo Price Index (TOPIX)
3 Dow Jones EuroStoxx 50 Price Index
4 Shanghai Shenzhen CSI 300 Index
5 S&P/NZX 50 Index with imputation credits
6 S&P/ASX 300 Accumulation Index
7 FTSE EPRA/NAREIT Developed Real Estate Index Net NZD Hedged
8 S&P Global Infrastructure Index (NZD hedged)
9 Bloomberg Global Aggregate Index – $NZ Hedged
10 Bloomberg NZ Bond Composite 0+ Yr Index
11 The trade-weighted index for the NZD is an indicator of movements in the average value of the NZD against the currencies of our major trading partners.