MARKET OVERVIEW

 

Volatility re-emerges in the first few months of 2018.

World shares were up 4.9% in the six months ending 31 March 2018. Emerging markets were again a strong performer, rising 9.1%.

US shares continued to deliver solid gains with the S&P 500 up 4.8%, while Japanese shares gained 5.4%. However, European and UK shares did not fare so well during the period, with these markets falling 4.5% and 4.3% respectively (all in local currency terms).

Interest rates have increased in the US over the past several months, and this has been a driver of increasing volatility in sharemarkets. The 10-year US Treasury yield rose from 2.33% to 2.74%, hitting a four-year high of 2.95% at one point.

This contributed to the S&P 500 in the US falling 10.2%, making February the first negative month since October 2016. This snapped a 15-month winning streak that was the strongest since the late 1950s. While we saw a rebound from these lows, volatility soon returned as President Trump announced a number of tariffs on imports into the US. This saw strong retaliatory talk from other regions, including Europe and China, stoking fears of a trade war that could dent global growth.

How the New Zealand and Australian markets fared

Closer to home, sharemarkets in Australia and New Zealand provided reasonable returns. The Australian market was up 3.5% while the local NZX 50 gained 4.9%.

On a trade weighted basis, the NZ dollar fell 2.4%, although it has been mixed against other specific currencies. The NZ dollar rose 0.5% against the US dollar and 2.4% against the Australian dollar, while it fell 3.8% against the British pound and 4.2% against the euro. This saw returns from US and Australian shares eroded by currency movements, but the declines from UK and European shares were less affected.

Local economic indicators remain solid. Retail sales have been strong, migration has fallen but remains above historic levels and economic growth has been dragged down by agriculture on the back of bad weather. The housing market remains mixed, and price gains have been limited to areas outside of Auckland of late. Business confidence still looks relatively pessimistic, despite a bounce from the post-election lows, where confidence fell to the lowest levels since 2009.

What is the future forecast?

There are many reasons for investors to be nervous at present. Valuations are high, markets have had an exceptional run and monetary policy tightening has started in some parts of the world. Geopolitical risks are also likely to increase, rather than subside. Volatility has returned in 2018 and at this stage in the cycle, it is likely to continue.

While we are advocating a more defensive slant in portfolios overall, we still see many opportunities as long as investors are willing to be more selective.