Last month we talked about the indicators pointing towards expected economic weakness, and therefore it comes as no surprise that this ended up being reflected in equity market falls in August. Whilst not our base case, there is still the potential for further and larger falls given the continuing deterioration of global economic conditions.
Amongst the very lackluster global data, from the slowdown in China, to the US inventories, to manufacturing in Germany, New Zealand is doing relatively well; but that belief may not be widely held given the worsening of both business and consumer sentiment from surveys and the RBNZ cutting interest rates by 0.5% taking it to a record low of 1.0%. Nevertheless, New Zealand is still intricately linked with global markets so we saw the NZX50 fall in value by a modest 0.9%. This was a far better outcome than the falls in other developed markets of around 2-4% depending on country and index being looked at.
By contrast, the sharp fall in bond yields saw bondholders receive significant mark-to-market gains in the value of their assets with sovereign bonds performing the best (up more than 2% over the month), and credit markets also providing strong performance notwithstanding the widening of credit spreads in response to equity market falls. Investors who held assets in foreign currency enjoyed a significant increase in value of these assets in NZ dollar terms as the NZD fell in value against all major currencies, -4.4% vs USD, -6.6% vs Japanese Yen and -3.4% against the Euro.
At the diversified fund level the more defensive Conservative Fund outperformed the Balanced Fund, which in turn outperformed the Growth Fund over the month and now over the 12 month period as well. This was compounded by some fund specific performance - the Concentrated Equity Fund that fell by 3.7% during August and the Option Fund that was down 12.4% in its worst monthly performance in 8 years following the collapse of yields in US treasuries (separate commentary has been provided on this strategy).
Looking forward, we expect uncertainty and market gyrations to remain elevated, but note that unless investors’ objectives or timeframes have changed, it’s generally unwise to make changes in strategy at such times.
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