As 2019 drew to a close, a common discussion around market participants was the continuing issue of low interest rates, and in particular what this means for investors and markets. Clearly, low interest rates mean reduced returns on cash assets, in addition it also resulted in relatively low coupons for bond investors, and therefore by extension lower yields (in the form of dividends and rents etc.) from growth assets such as equities and property. Or to express this another way, investors are prepared to pay higher prices to maintain income levels. It is therefore entirely understandable why equity markets in particular, but also bond markets, have produced strong returns for investors during 2019.
Towards the end of the year however, we saw that bond yields had ceased falling, investors believing that the bottom of central bank rate cuts was in sight (if not already completed) and that longer dated bond yields had started to rise (a ‘curve steepening’ in bond jargon). And so whilst in December equity markets generally continued their run of positive returns (Australia was a notable exception with a negative return), the bond markets extended the losses from November. In aggregate therefore, it’s no surprise that the Growth fund outperformed the Balanced fund, which in turn outperformed the Conservative fund.
One of the largest movements over the month was in the value of the NZ dollar against other currencies, and in particular the ~5% gain against the US dollar reversing losses from earlier in the year. Overall for the year, hedged and unhedged global assets provided investors with broadly similar returns, but there was a reasonable degree of intra-month volatility. By having half of the global equity exposure hedged (and the other half unhedged), the diversified funds were able to avoid much of this volatility.