Mark Lister, 3 July 2019

Most sharemarkets have done well over the past 12 months. The S&P 500 in the US, arguably the most high profile index in the world, has gained a solid 8.2 per cent. That's below the 12.3 per cent average of the past decade, but is a little higher than the long-term average, which has been 7.0 per cent over the last 50 years.

However, this seemingly middle of the road performance does mask a very volatile period in between.

During the final three months of 2018, the S&P 500 fell 14.0 per cent, the worst quarterly performance since September 2011. Sentiment improved dramatically at the start of this year with the index rebounding 13.1 per cent in the March quarter, which was the biggest gain since September 2009.

Trade tensions re-emerged in May, which led to a 6.6 per cent decline in the S&P 500, the worst May performance since 2010 and the second worst since 1962. Things turned around again in June, with US shares posting a 6.9 per cent monthly gain (the strongest June since 1955!).


New Zealand assets have been even better performers. The NZX 50 gained 19.2 per cent in the first half of 2019, while the listed property sector rallied 21.6 per cent. This takes the annual returns from these to an exceptional 17.4 per cent and 31.1 per cent respectively.

A key reason for the strength has been the increasingly accommodative attitude of the world’s central banks. The Federal Reserve in the US and the European Central Bank have been clear about the need to provide supportive policy if required, while we have already seen interest rates cuts in New Zealand and Australia in the past few months.

Unsurprisingly, above average (and highly tax efficient) dividend yields have attracted investors to listed property against the backdrop of interest rates hitting new record lows.

However, one sector that has benefitted from this theme even more strongly is utilities. The five electricity companies listed on the NZX delivered an average return over the 12 months ending 30 June 2019 of 52.0 per cent!

So where to from here? Financial markets are facing a number of challenges including ailing economic activity in some of the major regions, high valuations and a slowdown in corporate earnings growth.

Geopolitical tensions are also prevalent, with the tensions between the US and China likely to continue, and Brexit negotiations seemingly stalled.

However, growth is still decent (albeit subdued), inflation remains very low and central banks are focused on keeping monetary conditions accommodative.

Recessions are rare when central banks are taking this approach, and severe downturns in equity markets rare outside recessions. We are late in the cycle, but it could be a longer cycle than we have seen in the past.

Our recommendation is to remain invested, but to position portfolios defensively and to expect more volatility from here (as we have seen during the past 12 months).

Investors should ensure they are well diversified, and stick to quality businesses that are “best of breed”. Smaller, more cyclical businesses tend to be more economically sensitive during periods of weakness, so limit exposures to these.