The investment story for November is almost entirely one of equity market strength. The NZX50 was up by nearly 5% with the largest companies leading the upwards charge. Whilst the New Zealand market produced returns higher than the major markets, a strong month for US and European markets helped the MSCI All Countries index to return more than 2% (and closer to 3% on a currency hedged basis). Bond markets, by contrast, both domestically and globally produced small negative returns for investors.
Last month we observed that the negative sentiment that has been weighing on consumers and businesses appeared to have stopped dropping; if that remains to be the case then it’s perhaps unsurprising that equity markets have rallied and bond yields have started to rise slightly (hence the negative returns for bond holders over the past couple of months). From a NZ perspective, there had been some fears earlier in the year for the housing market to fall and this had weighed on public sentiment to some degree. With that fear being unrealised and the housing market picking up momentum again, not only are households feeling a little more confident, but some specific listed companies with property exposure have performed exceptionally strongly in the past couple of months. Globally, it would seem that fears around geopolitical risks have peaked. Although these concerns certainly remain elevated, the fact that the unease has already been priced into markets means any improvement results in a positive outcome for markets – hence why we’re observing equity markets being buoyant and bond yields rise modestly.
Overall, diversified fund returns were strong for the month of November at approximately 1.1%, 2.5% and 3.9% for the Conservative, Balanced and Growth funds respectively. This results in the returns for the past 12 months to be 10%, 13% and 16% (before tax and fees) for each of the funds which is more than double the expected annual rate of return. As we look forward to the next few years, not only do we not expect these levels of returns to be repeated, but we are likely to lower our previous expectations as the low interest rate environment results in less income from the defensive assets and less room for capital appreciation from the growth assets. This economic environment also encourages us to continue with the well-diversified investment strategy appropriate for the risk profile of the fund and to include a suitable level of exposure to alternative asset sectors.