ON THE HOME STRAIGHT
Mark Lister, October 2021
With September wrapped up, investors can look forward to warmer weather, the looming holiday season and a traditionally buoyant period for financial markets.
Global sharemarkets have had a good year so far. The MSCI All Country World Index rose 6.5 per cent in the six months to the end of September, taking the year-to-date return to a very healthy 12.2 per cent. The local NZX 50 index hasn’t been quite as strong, adding just 1.4 per cent in 2021.
Compared with pre-pandemic levels (early 2020 highs), world shares up are up a spectacular 27.3 per cent, while the New Zealand market is 10.0 per cent higher.
However, it is unlikely to be plain sailing in the coming six months, with some of the volatility that has emerged in recent weeks likely to persist.
September lived up to its reputation as one of the weakest months of the year, with the S&P 500 index in the US falling 4.8 per cent, its first monthly decline since January and the worst performance since March 2020, at the height of the pandemic.
Several factors have weighed on markets and investor confidence. Global economic growth has hit a speed bump, with momentum slowing in all the major regions, while the delta variant of COVID-19 has proved difficult to manage.
This has led to fresh restrictions in many places, hampered the recovery that looked so strong a few months ago.
Chinese economic activity has slowed particularly sharply, while the troubled property giant Evergrande has added to the uncertainty. A regulatory clampdown on technology companies has created additional nervousness among investors in the world’s second largest economy.
Markets are also grappling with the prospect of higher interest rates and less stimulative policies from the world’s central banks. This is something that will be firmly in the spotlight over the balance of this year, and into 2022.
In Australia, Europe and the UK, central banks have already begun “tapering” the level of their regular asset purchases (commonly known as quantitative easing, or QE).
The Federal Reserve in the US, which is the world’s largest and most influential central bank, is likely to do the same before the end of this year.
Monetary policy is likely to remain accommodative for an extended period, although moves to begin reducing the level of support are upon us. This could make for a bumpier ride as investors cope with the transition.
Here in New Zealand, the Reserve Bank halted its QE programme in July, opening the door for the first rise in the Official Cash Rate (OCR) since 2014.
Financial markets expect the OCR to be around 1.50 per cent by this time next year. This would still be low compared to the decade leading up to the pandemic, when the OCR averaged close to 2.50 per cent. However, it is a big jump from the near-zero levels that have prevailed for the past 18 months.
On the bright side, markets have seen this coming and adjusted in advance. Mortgage rates have been rising since June, and longer-term bond yields have risen to the highest in two-and-a-half years. A steady diet of OCR hikes might only have a modest impact, as much of this is “in the price”.
Encouragingly, the December quarter of the year is a typically lucrative period for investors. Since 1945, the final three months of the calendar year have produced an average return for the S&P 500 of 3.9 per cent, well above the 1.5 per cent average of the other three quarters.
The US market has finished the December quarter higher in 59 of those 75 years (79 per cent of the time), compared with a 62 per cent hit rate for the other three quarters of the year.