This quarter the market commentary and investment strategy thoughts are provided by Smartshares’ Chief Investment Officer, Stuart Millar, who is responsible for overseeing the investment of all funds managed by Smartshares Limited.
This quarter proved turbulent for both equity and bond markets but despite this ended on a positive note. Global property was the strongest performing asset class with falling bond yields driving demand for equities paying high dividends and stable cash-flows. Global equity returns for unhedged NZ-based investors were strongly positive as well, helped by the falling NZ dollar as economic concerns edged up. The Reserve Bank of New Zealand surprised markets with a 50bp rate cut in an attempt to spur economic growth. Together with the global demand for yield, this assisted local equities and property.
Global economic growth has been pressured by intensifying trade tensions and an increase in tariffs between the US and China. Global multi-national companies had been holding out for a trade agreement that would relieve them of the need to re-arrange supply chains. However, that was not the case and business sentiment globally has continued to deteriorate.
This resulted in action from the US Federal Reserve, where Chairman Jerome Powell has cut interest rates on two separate occasions this year. The Bank of China also responded by lowering the reserves required to be held by banks and allowed the Yuan to depreciate to assist exporters. We are yet to see substantial fiscal stimulus from the Chinese government but do suspect that this will be required if trade tensions continue to weaken economic growth.
As a small open economy, New Zealand is sensitive to worsening global economic conditions and business confidence has continued to weaken. The surprise move by the Reserve Bank to cut rates as much as they did may have created even more fear among business owners. However, the Reserve Bank does not have any more information than what is already publicly available.
International developed markets increased by around 7.0% over the quarter, lifting the annual return to 30 September 2019 toward 5.8% (FTSE Developed All Cap Index in NZ dollar terms). NZD-hedged equity returns were less attractive but were up 0.8% in the third quarter and over one year.
Despite ongoing trade tensions between the US and China, emerging market equities were up 2.6% in the quarter (FTSE Emerging Markets All Cap Index), with an annual return around 6.3% to the end of the September quarter.
Easier monetary policy and global demand for higher yielding assets lifted New Zealand and Australian shares. The S&P/ASX 200 Index was up 3.1% in the third quarter and is now up 12.1% in the 12 months to 30 September 2019. The S&P/NZX 50 Index was up 4.6% during the quarter, showing a stellar 17.2% over the 12-month period.
Global bonds continue to defy low return expectations and have delivered 2.6% this quarter and are up 10.0% in the 12-months to 30 September 2019 (Bloomberg Barclays Global Corporate Bond Index NZD hedged). New Zealand investment grade bonds returned 2.2% for the quarter and around 7.8% 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 30 September 2019. SuperLife Income, which has no exposure to equities, had a positive return of around 1.5% over the quarter and 6.0% over the year (all figures in this paragraph are after fees and tax at the highest rate).
The SuperLife Balanced fund returned around 2.4% in the quarter and 6.1% over the year, while the SuperLife High Growth fund, which largely invests in equities and property stocks, increased 2.7% in the quarter and 5.3% over the year.
SuperLife Ethica, which invests into funds with strict sustainability criteria, also performed well, returning 3.4% over the quarter and 7.3% over the year to 30 September 2019.