Strong performance despite surprising outcomes

By Russell Investments, UniSaver's investment manager and consultant

2016 was another good financial year for members of the UniSaver scheme. While several significant ups and down occurred – many of which were driven by political events – investment returns were strong for the full year.

The Cash option performed in line with expectations in 2016. However, the Conservative, Balanced and Growth options all had returns well above their long-term targets. Like last year these three options also performed very well against comparable KiwiSaver funds. Returns for all three were above the median KiwiSaver fund with comparable risk characteristics.  

With another strong year in the bank investors should be cautious in their expectations of investment returns going forward. While the global economy continues to improve, numerous elections and political decisions could create significant swings in markets again. 

A rough start due to worries about China 

Fears of a marked slowdown of growth in China caused a significant tremor in financial markets in January and early February of 2016. The doubts about the Chinese economy were accompanied by a further drop in the oil price, which added to the already heightened nervousness. As a result, many global share markets started the year with falls of 10% or more.

As with similar fears in late 2015, worries turned out to be relatively short-lived. Markets started to recover in the second half of February, and by the end of the first quarter investors were back in positive territory. 

Political surprises in the UK and the US

The second quarter was overshadowed by ‘Brexit’, the surprise decision of the United Kingdom to  leave the European Union. Most investors did not expect this outcome of the referendum, and many panicked in the immediate aftermath. 

But – as is often the case - patience and calm thinking were rewarded. It took financial markets just a week to recover from the initial shock and the third quarter was generally a good period for share markets around the world. While the effects on the economy in the United Kingdom may be significant in the long run, investors realised that the world economy would not be significantly affected. Markets were less forgiving of the British Pound, however, which continues to trade at a significantly lower level than prior to the referendum.  

History more-or-less repeated in November in the United States. Pundits had expected a clear win in the US presidential elections for Hillary Clinton, but voters proved them wrong. The election of Donald Trump sent massive shockwaves through financial markets on election day.

This time investors needed less than 24 hours and a conciliatory acceptance speech from the elected President to change their sentiment. Furthermore, Trump’s promises of tax cuts and infrastructure spending helped to create a sustained rally in share markets at the end of the year. In contrast bonds - normally a source of stability in investment portfolios – had losses close to 2% due to a view in the market that there is heightened risk of rising interest rates and inflation.

Closer to home, the New Zealand economy benefitted from a reversal of previously significant drops in dairy prices, alongside ongoing strong migration and tourism growth. Employment remained high, and the Reserve Bank provided support with 3 interest rate cuts as inflation remained stubbornly low. In contrast, house prices, particularly in Auckland, continued their recent boom.  

Outlook

Building expectations for 2017 may seem like listening to a broken record player. The outlook for major developed economies is again relatively positive, but share markets also look reasonably expensive – as they did at the start of 2016.

Given relative value, our preference remains to invest more in Europe and other parts of the world, and a bit less in the United States. And after nearly a decade of record-low interest rates the tide seems to be turning. Inflation is picking up and we expect the Federal Reserve in the United States to continue with the increase in interest rates in 2017.

Locally, our strategists see improving economies in Australia and New Zealand as positive news, but at the same time remain wary of inflated house prices. Last but not least, the political calendar around the globe provides ample opportunities for market shocks. Elections in Europe and policy decisions in the United States will be a key focus for investors throughout the year.  

With this uncertainty, it is possible that we will go through difficult periods in the market again in 2017. But as a member in Unisaver we encourage you to remain invested in line with your own time horizon and circumstances. Trying to time these periods of uncertainty is extremely hard, even for the most sophisticated investors.

At Russell Investments, we cannot control markets, but we will do our upmost to ensure that the options of UniSaver continue to perform well ahead of other retirement savings schemes in New Zealand.

 

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