2016…WHAT A YEAR
Mark Lister, 31 December 2016
As we approach the end of the year, 2016 will be remembered as one of significant change, which marked a number of important turning points. Markets were thrown more than one curveball, with forecasters calling the UK Brexit wrong, and then being caught wrong-footed again by the US election.
The US market fell five per cent immediately after the surprise Brexit vote, but within several days it had more than regained those losses. The reaction to the US election result was even more confounding, with the initial panic superseded by euphoria within a matter of hours. US shares have rallied strongly since the election, hitting new record highs.
Despite the volatility and uncertainty that has prevailed this year, returns are shaping up solidly for share investors in most regions. US and UK shares are both up around ten pent cent, while the Australian market has posted similar gains.
The local NZX50 is up 7.5 per cent, including dividend payments. While this is a solid return slightly above the long term average, the index remains some way below its September peak, at which point it had gained almost 20 per cent for the year.
A key reason for the local market lagging global peers is the substantial rise in interest rates, which has been the real story this year. The US ten-year government bond yield is currently above 2.5 per cent, higher than where it started the year and well above the July low of 1.4 per cent.
Local interest rates have followed, with five-year swap rates rising above three per cent. This isn’t quite as sharp as we’ve seen in the US, but you might still feel it if your mortgage is up for renewal in 2017.
These moves have seen growth sectors (like financials, industrials and materials) rally strongly, while interest rate sensitive sectors (like utilities, real estate and telcos) have fallen out of favour. The New Zealand sharemarket is dominated by higher yield, defensive companies, hence we’ve been under pressure in recent months.
One bright side of the rebound in interest rates is the strength we’ve seen in the US dollar. On a trade weighted basis, the greenback has risen to its highest level since 2002. Our currency has held up better than most against the US dollar, but it’s still dipped below US$0.70.
This is timely for many exporters, including the dairy sector, which should see some much better returns over the next twelve months. A year ago we were looking down the barrel of a sub $4.00 payout, but a 50 per cent rally in dairy prices since July should see this comfortably above $6.00.
When we look back on 2016 with the benefit of hindsight, those might not have been the only important turning points. We could have seen the peak of the Auckland housing market this cycle, or a crucial shift in the balance of power in Wellington.
It feels like the upward moves in interest rates and the US dollar have further to run, so we can certainly expect more excitement in the months ahead.