Key Market Movements for the Final Quarter in 2016

New Zealand shares

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The local market endured a weak final quarter in 2016. With overseas interest rate markets reacting swiftly to Donald Trump’s victory in the US presidential election, some of the previous strong foreign demand for New Zealand high yield stocks cooled quickly. Selected companies still performed well, including Pacific Edge +28.3%, New Zealand Oil & Gas +22.4% and Air New Zealand +18.0%. But, overall, losers outnumbered winners with Orion Health -42.7%, Trustpower -35.7% and Auckland International Airport -15.0% helping drag the index lower. Source: S&P/NZX 50 Index, gross with imputation credits


New Zealand fixed interest

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The Reserve Bank of New Zealand reduced the Official Cash Rate by a further 0.25% in November. However, global and domestic bond yields continued to rise through the quarter, fuelled in part by the US Federal Reserve hiking rates in the US and additional anticipated stimulus from the Trump presidency. Although the bond sell-off over the quarter returned longer dated bonds closer to fair value, the immediate pricing impact saw the New Zealand Corporate A Bond Index deliver its worst quarterly result on record. Source: S&P/NZX A Grade Corporate Bond Index


New Zealand property

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The rapid shift in overseas interest rate expectations provided a strong headwind for New Zealand property assets. With relatively high yielding New Zealand property having been a popular destination for foreign yield-seeking investors in recent years, the turnaround in US interest rate expectations saw a sizable rotation away from New Zealand property this quarter. This resulted in the domestic real estate index suffering its worst quarter since the March 2009 quarter at the end of the GFC. Source: S&P/NZX All Real Estate Index, gross with imputation credits


Australian shares

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The Australian share market performed significantly better than the New Zealand market over the quarter, driven by the energy sector (higher oil prices) and banking shares (higher interest rates and Basel IV relief). This led to large capitalisation companies faring the best on a relative basis with the S&P/ASX 100 delivering a useful +4.57%, while the S&P/ASX Small Ordinaries shed -3.59% (both returns in New Zealand dollars). Source: S&P/ASX 200 Index (Total Return)


International shares

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+5.27% (hedged to NZD) +6.79% (unhedged)

Developed market shares performed well over the quarter, generally benefitting from an increased investor appetite for risk assets. Economic data, particularly for the US and China, continued to beat expectations, and the additional economic stimulus anticipated under the Trump administration proved to be positive for US shares in particular. Commodity prices also strengthened, with the oil price lifting further after OPEC announced production cuts. A slightly weaker New Zealand dollar saw reported returns from unhedged equities outperforming the comparable returns from hedged investments. Source: MSCI World ex-Australia Index (net div.)


Emerging markets shares

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Returns from emerging markets shares were only mildly positive for the quarter (in New Zealand dollars). While the fundamentals in emerging markets are strong with gross domestic product growth accelerating, their prospects became a little more clouded given the stated economic and trade policies of the incoming Trump administration in the US. Egypt was again the best performing single country in the emerging markets this quarter, however, it was the double digit returns from many of the European constituents, including Russia, which helped offset weaker returns from China and India. Source: MSCI Emerging Markets Index (gross div.)


International fixed interest

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The US Federal Reserve met expectations by hiking interest rates by another 0.25%, and the US Federal Open Market Committee members also raised the projected path of forward rate movements (at least partly due to the anticipated stimulus from the Trump presidency). This resulted in a sharp spike in longer dated bond yields, which saw the US ten year bond yield unexpectedly rise 0.85% over the quarter and impacted yield curves around the globe. This pulled most bond indices into the negatives, with longer duration and/or credit indices generally faring worse than the relatively shorter duration Citigroup World Government Bond Index 1 – 5 Years (in NZD). Source: Citigroup World Government Bond Index 1-5 Years (hedged to NZD)


International property

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International property fared somewhat better than domestic property during the quarter, when the main investor reaction appeared to favour some movement from bonds (and previously high yield New Zealand assets) into selected international risk assets. The S&P Developed REIT Index was negative in US dollar terms, however, a general weakening in the value of the New Zealand dollar during the quarter helped offset the bulk of the underlying asset class weakness. The Australian listed property sector was also down for the quarter, with the S&P/ASX 300 A-REIT Total Return Index shedding 0.73% in Australian dollar terms. Source: S&P Developed REIT Index (total return)

All returns are expressed in NZD. It is assumed that Australian shares, emerging markets shares and international property are invested on an unhedged basis, and therefore returns from these sectors are susceptible to movement in the value of the NZD.

By |2018-01-25T14:01:01+00:00December 12th, 2016|Good advice|0 Comments