INSIGHTS BLOG

MARKET OVERVIEW

Mark Lister, 17 April 2019

The final three months of 2018 were extremely volatile, with US shares falling 14.0%, the worst quarterly performance since September 2011. It was a similar story in Japan, Europe, the UK and Australia. The local market proved more resilient, with the NZX 50 declining just 5.8%, a modest fall relative to most other regions. Investors were concerned about a range of issues, including slowing economic growth, rising interest rates and ongoing trade tensions between the US and China.

In contrast, the March 2019 quarter was exceptionally strong. After suffering the worst quarterly performance in seven years at the end of 2018, the S&P 500 rebounded 13.1%, the biggest quarterly gain since 2009, and the best March quarter since 1998!

Over the six month period as a whole, world shares are down 1.9%. Many markets having recovered most, but not all, of the losses from the December quarter. US and UK shares are down 1.7% and 1.1% respectively, while emerging market shares and European equities are up slightly (1.8% and 0.3%). Japanese shares have fared worst, having fallen 10.9% during the six months ending 31 March 2019.

How did New Zealand and Australian markets fare?

Shares in New Zealand and Australia have performed well over the past six months, falling less than other markets in late 2018, while still rising solidly during the first few months of this year.

Over the six months the local NZX 50 has been a clear outperformer, rising 5.3% on the back of some high quality growth companies that continue to deliver and some very stable dividend payers that look attractive as interest rates have continued to decline.

Australian shares have also been solid, with the ASX 200 delivering a 1.8% return. While this is behind that of New Zealand, a positive return is impressive when many international markets have slipped.

On a trade weighted basis, the NZ dollar increased 2.4%. The currency gained against all major trading partners, in particular the euro (a rise of 6.3%) and the Australian dollar (a 4.7% gain). This saw returns from offshore shares eroded slightly by currency movements.

What should we expect from the coming six months?

A big driver of markets in recent months has been moves from central banks, with these impacting interest rate markets as well shares. We saw a significant change in stance from US central bank, the Federal Reserve, which suggests much easier monetary policy than many were expecting. The Reserve Bank of New Zealand (RBNZ) also delivered a surprise to financial markets, unexpectedly shifting to an easing bias (which means it is leaning toward interest rate cuts).

We expect this to remain a focal point over the coming year, and if this cautious stance continues low interest rates could provide support for asset classes such as shares.

However, for markets to rise further on a sustainable footing, we believe global economic growth needs to stabilise. All of the major regions have lost momentum during recent months, and it is hard to see the current optimism continuing unless activity picks up.

For this to happen, we probably need to see some sort of resolution of the ongoing trade dispute between the world’s two largest economies - the US and China. On the other side of the Atlantic, Brexit uncertainty continues to hang over the UK and Europe.

Locally, markets will be watching for the next move from the RBNZ, now that it has suggested interest rates cuts were on the cards. The Government’s response to the Tax Working Group (TWG) report, due this month, will also be of interest to domestic investors.

In focus

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Global: Nike

A new addition to our investment options. Nike is an athletic apparel, footwear, and equipment powerhouse. We believe Nike is an attractive long-term investment opportunity for investors wanting exposure to the consumer discretionary sector given its strong brand and enviable market position.

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New Zealand: Freightways

Freightways provides courier services, their brands include New Zealand Couriers, Post Haste Couriers, Castle Parcels, NOW Couriers, SUB60, and DX Mail. Growth in parcel volumes is likely to be supported by the structural shift towards increased online spending.

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Australia: Transurban

Transurban is Australia’s largest toll road operator with roads across Sydney, Melbourne and Brisbane. In addition, Transurban has expanded its footprint with assets in the Washington DC area and Montreal. We like Transurban for its stable cash flows, scale, and inflation linked pricing models.

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