Market commentators have been increasingly vocal around the ongoing deterioration in sentiment, and indeed a number of hard economic indicators continue to be weak. However, there seems to be some very large underlying forces (namely the actions of Government and central banks) which are overpowering some of the more typical bottom-up drivers of short-term market movements (e.g. company and sector specific factors). Whilst this applies in some small way to the political mess in Europe, it mostly applies to the ongoing power struggle between the US and China which is playing out in a number of ways, the most obvious of which is the trade war, but other less publically discussed areas are no less significant. Amid this global uncertainty, the perceived relative stability in NZ means that although sentiment domestically is weak, foreign interest in NZ assets remains high. The NZ dollar has generally weakened in recent weeks not least due to the expectations around the lower Official Cash Rate (OCR). Consequently, investors whose overseas assets weren’t hedged experienced better returns (in NZ dollar terms) than those who had hedged their currency exposure.
At the diversified fund level, overall gross returns during September were a modest, but respectable 0.3%, 0.6% and 0.7% for the Conservative, Balanced and Growth funds respectively. With bond yields stabilising, following the large movements in August, equity markets had a strong month and bond markets gave back a small amount of the gains generated in August. This broad pattern was true both in New Zealand and overseas.
As noted in last month’s commentary, we expect the uncertainty in markets to persist, and that interest rate policy will remain low across all major economies. All other things being equal, forward looking return expectations for all the diversified funds are therefore lower than they were previously and we would be surprised if the next 3-5 years generated the same level of returns as the previous 3-5 years.