Each of the diversified funds produced a similar negative return during October but for different reasons – NZ equities fell back by over 1.2% to hurt the performance of the funds that have more growth asset exposure, and bond markets sold off to hurt the performance of the more defensive/income orientated portfolios. However, the broad theme for the month was generally more positive economic data and improving prospects on the initial trade agreement between China and US helping to explain the increase in bond yields and the subsequent fall in value. Developed global equity markets were generally positive in aggregate. More specifically, the US and Japanese markets were positive (up 2.5% and 5.4% respectively), but the UK was down 2.2. The reason for the softer performance in NZ was largely due to the specific sell off in the energy sector following uncertainty around Rio Tinto’s comments on its commitment to the aluminium smelting plant near Invercargill and associated impact on electricity demand. In addition the strength of the NZ dollar over the month meant that any unhedged global asset returns were negatively impacted on a NZ dollar basis.
Previously we’ve commented on the weak sentiment that’s been observed both in NZ and globally from consumers and businesses. Interestingly, some of those sentiment surveys are showing signs of turning, or at least bottoming out (see our Fixed Interest Fund fact sheets for more on this), but it remains the case that markets are highly sensitive to, and dependent upon, political positions and policy decisions. One aspect of the recent movements in financial markets which should be reflected on is the lower expected returns in the short-medium term. We have been surprised at the very high returns gained across multiple sectors over the past year, and note these are not sustainable and well above long run averages. Accordingly, with interest rates at historic lows and market valuations already pricing in a lengthy period of low interest rates, investors should be adjusting their expectations for returns over the next few years.