Investment Returns – Good news for shares

Good Returns for Equities

Investors in our more Growth asset oriented portfolios enjoyed returns of up to 5% for the quarter. This brings annual returns for these portfolios as high as 16%. The strong outcomes masked significant differences in returns between different markets and asset classes over the quarter. This is illustrated in the chart below that shows the returns achieved in the MAS KiwiSaver Balanced Portfolio.

Driving this quarter’s returns were ongoing strong earnings growth by companies in the United States and increasingly around the world. This helped offset bouts of investor nervousness (reflected in lower weaker share prices) around possible trade wars between the United States, China and the European Union.

As New Zealand is a small, export dependent economy, the possibility of us being caught up in a global trade war led to a 2% fall in the New Zealand Dollar. This boosted the value of shares held overseas. It also led to increased expectation by investors that the New Zealand Official Cash Rate (OCR) will remain at or below the current record low of 1.75% well into 2020. In contrast, the United States Federal Funds Rate (their equivalent of our OCR) was 2.25% at quarter end, and in response to a strongly growing economy and rising inflation is likely to be 3.25% in a years’ time. This makes the United States more appealing to fixed interest investors than New Zealand.

The prospect of higher short-term interest rates in the United States led to their long-term interest rates rising (bond capital values falling). This move was repeated in other world fixed interest markets to varying degrees. This meant that returns from the international fixed interest asset class were well down on the prior quarter.

Our Investment Managers Outlook

Despite some weakness in international sharemarkets since quarter end our investment manager, JBWere, remain positive on the potential returns from international equities. They point to a backdrop of robust economic growth in most countries, strong earnings growth and low interest rates. That said, they note that the fact that we are in the late stages of one of the longest increases in global share markets in history is reason for caution. Further, there are several potential risks that they are watching closely, like developments around global trade and instability in emerging markets such as Turkey and Argentina. They don’t see significant risk warning indicators on the near-term horizon to cause material concern. They continue to forecast global equities to generate a positive return over the next 12 months. But investors will need to adjust to a higher level of volatility.