Market update – Uncertainty drives ups and downs in the market

By Tim O’Loan, Senior Investment Analyst.

Markets around the world have seen record highs, large falls, and steep recoveries over the past 18 months. But depending on your choice of investment fund, you may have experienced a roller-coaster of returns, or a sedate paddle-boat ride. It all depends on the ‘risk’ of the fund you chose.

Our funds, such as the BNZ KiwiSaver Scheme funds and YouWealth, are designed to give you choices when it comes to balancing risk and return. This means they have different mixes of investment types within them. Funds that are meant to be invested in for longer periods will have a higher proportion of growth assets (shares in companies) than funds designed for shorter time periods or customers who are wanting a less risky option. The lower risk funds, which are likely to suit people closer to retirement or saving for their first home, have more fixed interest assets and cash.

After a period of relative stability, where both New Zealand and international share markets performed very well, 2018 and 2019 saw the return of market volatility (ups and downs). Two causes for this uncertainty are clear. First, disagreements about trade between the United States and other countries (such as China) became a bigger issue in the middle of 2018. Also, share markets reacted to concerns about rising debt and currency weakness in less-developed countries. Despite these challenges, shares have generally continued to perform well, with the notable exception of the last three months of 2018 when global shares dropped in value significantly (down by 13.8%[1] for the quarter).

That drop in value resulted in 2018 being the worst year for global shares since the Global Financial Crisis. Global shares were down by 5.7% for the year. However, New Zealand shares performed better in 2018 and finished the year up 6.0%[2] despite also losing value towards the end of the year. This difference in performance shows the value of diversification – spreading investments across geographies, industries and investment types helps protect against poor performance in one area.

The first half of 2019 has seen a return to more widespread strength, with share markets rebounding and making up those losses. This sort of up and down performance is what we expect to see over shorter time periods.

A major cause of the recovery was low interest rates, with the United States central bank (US Fed) indicating that it was more likely to reduce interest rates than raise them.

While this helped drive share markets higher (when it’s cheap to borrow money people tend to spend more which helps companies), it’s worth remembering that falling interest rates are also great for more conservative investments such as fixed interest. For the year ending March 2019 global fixed interest investments were up 4.6%[3]. Over the same period New Zealand fixed interest investments were a global outperformer, returning 5.1%[4]. This calendar year is also proving to be a very good year for fixed interest investments, with New Zealand still ahead of the pack returning 7.5% for the first half of the year.

While continuing low interest rates and strong government spending should help global economies, uncertainty around trade will continue and other risks to the global outlook, such as Brexit, remain. Investment markets do not like uncertainty, and without clarity on these issues there is a risk of market over reactions to negative headlines. Investors should expect some bumpy times ahead. But this is not unusual during an investment journey. Investors who choose a fund that suits their investment timeframe and their attitude to risk should be well placed to handle any difficult market conditions that occur from time to time.

Important information:

This publication is solely for general information only and does not constitute, and is not intended as, personalised financial advice or as a replacement for legal or tax advice. We recommend seeking advice specific to your personal financial, legal or tax situation from a qualified adviser.

BNZ Investment Services Limited, a wholly owned subsidiary of Bank of New Zealand (BNZ), is the Issuer and Manager of the BNZ KiwiSaver Scheme and YouWealth. Download a copy of the relevant Product Disclosure Statement from bnz.co.nz/kiwisaver or bnz.co.nz/youwealth

No representation or warranty is made as to the accuracy, reliability or completeness of any statement made in this publication. Neither Bank of New Zealand (BNZ) nor any person involved in the preparation of this publication accepts any liability for any loss or damage arising out of the use of, or reliance on, all or any part of this publication. Where the information and recommendations in this publication are provided by a specific author, the information and recommendations are the personal views of that author and do not necessarily reflect the views of BNZ.

BNZ Advisers’ Disclosure Statements are available on request and free of charge. Past performance is not an indication or guarantee of future performance.

[1] MSCI All Countries World Index (50% hedged to NZD)
[2] S&P/NZX50 Index including imputation credits
[3] Bloomberg Barclays Global Aggregate Index (100% hedged to NZD)
[4] 50:50 S&P/NZX Investment Grade Corporate Bond Index & the S&P/NZX Government Bond Index