Global share markets ended the year in stellar form as US-China trade tensions eased and monetary policy stimulus started having a positive impact on some key global leading economic indicators. Some strength in the NZD towards the end of the quarter took some of the gloss off returns in global shares for unhedged investors. On the flipside, the gradual easing in geopolitical concerns and improving outlook for global growth resulted in meagre returns for fixed income investors during the quarter.
Both the Federal Reserve in the US and the RBNZ backed away from further easing, suggesting that enough had been done for now and further evidence of economic weakness would be required to cut rates further. Global growth is far from out of the woods, even though there have been signs of improvements. The US ISM manufacturing index showed that manufacturing activity continues to contract in the region, although the services index within the same survey remained strong, as did employment. China’s business activity slipped in December after expanding throughout most of the year.
Improving expectations of a trade deal between the US and China also lifted the outlook for global economic growth and had the biggest influence on share markets during the quarter. While we doubt this is the end of the stand-off between the world’s two largest economies, the deal removes prospect of companies having to pay higher tariffs into 2020. Interestingly, the US National Bureau of Economic Research released a working paper showing that US tariffs have been passed on entirely to US importers and consumers.
The NZ share market continued its unabated trend due to low interest rates. NZ shares remain relatively attractive exhibiting defensive characteristics amid a turbulent geopolitical environment. Arguably, stocks appear quite expensive but with easy monetary policy the hurdle rate for investment is low and earnings growth sustainable. The fourth quarter showed a lift in NZ house prices further unpinning household sentiment and consumption.
International developed markets increased by around 2.1% over the quarter, lifting the annual return to 31 December toward 27.8% (FTSE Developed All Cap Index in NZ dollar terms). NZD hedged equity returns were up 8.9% in the fourth quarter and 28.5% over one year.
Despite ongoing trade tensions between the US and China, emerging market equities were up 4.4% in the quarter (FTSE Emerging Markets All Cap Index), with an annual return around 20.6% to the end of the December quarter.
Easier monetary policy and global demand for higher yielding assets lifted NZ and Australian shares. The S&P/ASX 200 Index was up 0.7% in the third quarter and is now up 23.4% in the 12 months to 31 December. The S&P/NZX 50 Index was up 5.2% during the quarter and showing a stellar 30.4% over the 12-month period.
Global bonds have delivered -0.6% this quarter and are up 7.6% in the 12 months to the end of December (Bloomberg Barclays Global Corporate Bond Index NZD hedged). NZ investment grade bonds returned -1.1% for the quarter and around 5.3% for the year.
Given the strong performance of markets, SuperLife fund returns were positive across the board in both the quarter and over the year to December 2019. SuperLife Income, which has no exposure to equities, had a negative return of around -0.4% over the quarter and 5.1% over the year (all figures in this paragraph are after fees and tax at the highest rate).
The SuperLife Balanced fund returned around 1.7% in the quarter and 14.8% over the year, while the SuperLife High Growth fund, which largely invests in equities and property stocks, increased 3.2% in the quarter and 21.1% over the year.
SuperLife Ethica, which invests into funds that have strict sustainability criteria, also performed well, returning 2.7% over the quarter and 18.2% over the year to December 2019.
Figure 1 Major markets 12 months to December