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Global markets continue to deliver strong returns

World shares were up 10.0% in the six months ending September 30. The top performing region during the period was emerging markets, where the return was 14.9%. US shares have continued to perform very well, adding 6.6% over the period and finishing at close to record highs. Locally, the NZX 50 has continued to strengthen, shrugging off political uncertainty in the lead up to the September election. The domestic market posted a 10.2% gain during the six months, including dividends.

The NZ dollar was mixed during the period, rising 2.9% against the US dollar, but falling 3.5% against the British pound and 7.2% against the euro. The currency was flat against the Australian dollar. This saw returns from US shares eroded by currency movements, but gains from UK and European shares improve.

Global economic data remains very solid. The ISM manufacturing index in the US recently hit its highest level since 2004, while similar measures in Europe are at six-and-a-half year highs. Japan still looks attractive to us, while India remains a bright spot in an otherwise risky emerging market landscape. Australia remains a challenge, given its high budget deficits, political dysfunction and question marks over dominant sectors like banks and resources.

The New Zealand economy is in good shape, with a strong agricultural backdrop offsetting a slower construction sector and a potential peak in migration. We continue to advocate a defensive slant in portfolios, as well as a strong bias to quality.

Markets are heading into the next six months in relatively good health. Economic data is robust in most of the major regions, and the time of the year that normally heralds seasonal weakness in share prices has passed. However, numerous risks remain.

Valuations remain high for all asset classes (shares, property and bonds), volatility is very low, and we have central banks starting to think about how they might unwind some of the stimulus of recent years. While this could be an innocuous process, it remains to be seen how it will influence interest rate markets, as well as currencies and asset prices. Rising tensions around North Korea have kept markets on edge during the last few months, and the Italian election in 2018 could see political risk re-emerge in Europe.

Here at home, attention will be on the make-up of the incoming government and what that might mean for policy changes in key areas like tax, housing, migration and the environment. Businesses will be nervous about all of these issues, something that has been reflected in recent confidence surveys.

The New Zealand economy looks solid relative to many others and our cash rate remains higher than most, so the NZ dollar could remain above long-term averages to reflect this. However, as the country enters a phase of more modest growth and other regions continue to improve, the currency could slip against some trading partners.

 

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