Chinese Whispers and Social Media
If you want to build a reputation for credibility, don’t join the mainstream financial media.
They predicted financial Armageddon when there was increased volatility in China at the start of the year. It never eventuated.
Then came the surprise Brexit vote at the end of June and the naysayers came out in force again. “As we predicted”, they said, “the end is nigh”. Wrong again.
In fact, for investors with a 40% or higher allocation to riskier growth assets, the third quarter of 2016 represented the second best quarter in the last three and a half years! In other words, investors who blocked out the uninformed media noise and stuck to their strategy were rewarded with strong returns, while those who acted on the noise quickly regretted it.
In such a good quarter, it’s not surprising that most asset classes performed above expectations.
With central banks committing to continue with accommodative monetary policy settings and an easing in concerns over the impact of the UK’s vote to exit the European Union, global equity markets were major beneficiaries of the improving investor sentiment.
Emerging market equities led all sectors, with the MSCI Emerging Markets Index gaining 9.15% in US dollar terms and 7.03% for unhedged New Zealand dollar investors. Signs of greater stabilisation in the Chinese economy provided strong support for the region’s markets, as did additional stimulus from global central banks which outweighed earlier concerns about the potential pace of the US interest rate normalisation process.
Australasian equities also performed with distinction, with the New Zealand and Australian markets both enjoying a strong period. In New Zealand, large companies with relative earnings and dividend stability did particularly well, while a rally in metals prices saw similarly strong performances from metals and mining companies in Australia. New Zealand’s S&P/ NZX 50 Gross Index recorded a gain of 6.72% for the quarter, while Australia’s S&P/ ASX 200 Total Return Index rose 5.14% in Australian dollars.
Hedged international developed market equities were not far behind, with the MSCI World ex Australia Index (hedged to NZD) rising 5.23%. The US market advanced on better than expected second quarter earnings results and British and European shares even joined the bounce-back party, in spite of sizable outflows from mutual funds investing primarily in European shares.
The MSCI World ex Australia Index (unhedged) was up 2.75% in New Zealand dollar terms. The fact that the unhedged index generated a return almost 2.5% lower than the comparable hedged index indicates the New Zealand dollar, on average, strengthened over the period against its major trading partners.
While these all represented very attractive quarterly results, the bulk of these gains were in fact delivered in the first four to six weeks of the period, as global equity markets bounced sharply off their post-Brexit lows. Whilst risk aversion levels spiked in late June during the immediate aftermath of Brexit, July was emphatically a ‘risk on’ period, and the strong recovery in July went a long way to ensuring an attractive overall return for the quarter.
With the USFederal Reserve still hinting at the prospect of a further rate hike before the end of the year, the global listed property sector was only flat for the quarter with the S&P Global REIT Total Return Index up just 0.02% in USdollar terms. This was a notable departure for an asset class which has consistently been amongst the strongest contributors over the past three to five years.
In contrast, the Reserve Bank of New Zealand (RBNZ) reduced the Official Cash Rate by another 0.25% in August, citing weak global growth and that New Zealand’s relatively high interest rates were placing upward pressure on the exchange rate. Additionally, the RBNZ indicated further easing would be likely to ensure future inflation settles near the mid-point of the target range. In this environment, domestic listed property assets held up much better than their international counterparts, with the S&P/ NZXAll Real Estate Index gaining 2.06%.
Similarly, the domestic bond market benefitted from a moderating New Zealand interest rate outlook. In July, when the local market was pricing an almost 100% probability that the RBNZ would cut rates by 0.25% in August (which they subsequently did), the New Zealand ten year government bond yield fell from 2.35% to an all-time low of under 2.20%. This strengthened demand for local bonds and propelled the S&P/ NZXA-Grade Corporate Bond Index to a gain of 0.96% for July alone, and 1.61% for the full three months to Septem ber.
In international bond markets there was a little more variability in interest rate movements, which was highlighted by the respective performances of major ten year government bond yields. Through the quarter, US yields increased by 12.5 basis points with the Federal Reserve still pointing to future rate hikes, while comparable German yields were flat and UKyields fell by 12 basis points. In this environment the returns from international bond markets were a little more subdued than they had been for the first half of this year, with the Citigroup World Government Bond Index 1-5 Years (hedged to New Zealand dollars) gaining 0.55% for the quarter while the longer duration Barclays Global Aggregate Bond Index (hedged to New Zealand dollars) gained 0.97%.
When the dust finally settled at the end of September, well diversified investors could look back with some satisfaction at having achieved attractive returns for the period. The earlier negative speculation about China and the more recent Brexit bears both delivered far more bark than bite, and not even the flickering prospect of a Donald Trump presidency in the USA was enough to derail the bounce-back gains investors enjoyed this quarter.
So will the media always get their predictions as badly wrong as they have so far this year?
Well, not if they stick to making consistently negative forecasts. Even though markets on average go up, there will always be periods in the future when the markets will disappoint. But no one – and certainly not the mainstream media ‘experts’ – has any idea exactly when that will be. If they keep crying wolf at every piece of negative news, then the law of averages says that one day, the markets will agree with them. Unfortunately, given their overall abysmal track record in predicting the future, it will only be a coincidence when that happens. After all, even a broken clock is right twice a day, but it’s still a broken clock.
Unless their financial adviser is a newspaper editor, investors should shut out the media noise and stick to the carefully considered investment strategies designed with their specific long term goals and objectives in mind.