Market update – quarter ending 31 December 2018
from Russell Investments, UniSaver’s investment manager and consultant
Global share markets fell sharply during the fourth quarter, with the MSCI All Country World Index declining by nearly 13% in New Zealand dollar hedged terms. Fears of rising interest rates in the United States, softer than expected manufacturing activity around the world and ongoing trade frictions between China and the United States were some of the main storylines that contributed to the negative returns.
After staying flat for most of the year, global fixed income investments experienced strong returns in the fourth quarter. Prices of fixed income investment, generally considered to be more defensive than equities, rose during a period of heightened uncertainty in investment markets.
In New Zealand, share markets were also negatively affected by the global trend, however the relatively defensive nature of listed companies in New Zealand meant that the drop was significantly smaller than in other parts of the world. Some positive shareholder updates and further corporate activity, including competing offers for the country’s largest online market operator, Trade Me, also helped to limit the declines in the local market.
The New Zealand dollar strengthened amidst encouraging domestic earnings updates and a drop in long-term US interest rates. The broad trade-weighted index of the New Zealand dollar rose by nearly two percent over the quarter.
How did markets affect UniSaver’s investment options?
Conservative, Balanced and Growth were all negatively affected by the turmoil in global and local markets. However, global listed property, global high yield and global listed infrastructure sectors helped to soften the impact of the drawdown in equity markets. Allocations to these asset classes were introduced in February 2018 to increase the diversification potential of the options, and it was positive to see that these asset classes performed accordingly in the fourth quarter.
However, given that the New Zealand share market performed relatively better than other global markets, UniSaver’s options did not perform as well as portfolios with higher allocations to New Zealand shares in the fourth quarter. This relatively negative outcome was somewhat softened through UniSaver’s strategy to hedge offshore currency exposures. Had the assets not been hedged, the rising New Zealand dollar would have led a lower return through foreign exchange losses.
Overall, Conservative, Balanced and Growth all ended up with negative returns for the 2018 calendar year. While disappointing, it is important to put this into a longer-term context. In the prior ten years, all markets were almost constantly going up. Given the nature of investment markets, a temporary correction and negative annual returns have to be expected from time to time.
Russell Investments’ strategists believe that the fourth quarter of 2018 showed that markets were looking ahead to 2019 and projected a slowdown in economic growth and corporate earnings. While some market participants anticipate that fourth-quarter earnings growth in the United States will come in around 10%, the market is likely to view this in comparison to the 20% to 25% earnings growth experienced during the third quarter of 2018. Despite this slowdown in earnings growth, many economists do not anticipate a recession in 2019, with growth numbers still positive and inflation relatively low.
Nevertheless, we expect volatility to continue throughout the first quarter of 2019, especially whenever significant news around the trade tensions between China and the United States or Britain’s departure from the European Union sway investors into a more positive or negative mood.
The information contained in this publication was prepared by Russell Investment Group Limited (RIG). RIG is the investment manager for UniSaver. This publication has been compiled from sources considered to be reliable, but is not guaranteed. This publication provides general information only and should not be relied upon in making an investment decision. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation and needs. All investments are subject to risks. Past performance is not a reliable indicator of future performance.
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