Commentary on the December quarter and 2021 year by Russell Investments, UniSaver’s investment manager and consultant
2021 - same, same but different
Global share markets were higher in the December quarter, driven largely by a series of encouraging US and European earnings updates. Stocks benefited from the prospect of additional US infrastructure spending and further corporate merger and acquisition activity. Sentiment was further buoyed by the People’s Bank of China’s decision to reduce the required reserve ratio, i.e. the amount of cash the country’s banks must hold as reserves, and Beijing’s vow to prioritise economic stability in 2022, sparking hopes of additional stimulus to help fuel growth.
Limiting the advance was central bank tapering and tighter monetary policy globally, with the Reserve Bank of New Zealand (RBNZ) and the Bank of England (BoE) amongst the first developed countries to begin raising interest rates. The RBNZ lifted its official cash rate twice during the period (to 0.75%), while the BoE raised its benchmark interest rate to 0.25% in December; a rise of 0.15% and the central bank’s first rate hike in more than three years. At the same time, the US Federal Reserve (Fed), citing very strong growth and high inflationary pressures, announced its plan to wrap up its massive asset-purchase program in March. Fed chair Jerome Powell also conceded that using the term ‘transitory’ to describe inflation was no longer appropriate, implying that the Fed now believes inflationary pressures are likely to persist. Stocks were also impacted by fears that rising COVID-19 infections in the US, Europe and China could derail the global recovery and potentially add to already high inflationary pressures. Sentiment was further impacted by heightened geopolitical uncertainty, including the threat of conflict between Russia and Ukraine and rising tensions between the US and China after Washington reaffirmed its support of Taiwan.
Meanwhile, economic data was mixed over the period. The US saw further encouraging retail sales figures and a sharp rise in consumer spending, the euro-zone economy expanded 2.2% in the third quarter. Offsetting this was news the US economy expanded by less than anticipated in the September quarter and a further rise in US inflation, with consumer prices climbing 0.8% in November. For the year US consumer price index jumped 6.8%; the measure’s largest annual gain in almost 40 years.
At the country level, the three major US indices – the S&P 500 Index, the Dow Jones Industrial Average and the tech-heavy NASDAQ – all recorded new highs over the period. Stocks also rose in Europe, the UK and China but fell in Japan and New Zealand, which recorded a 5% decline in price over the year.
New Zealand markets
The New Zealand economy contracted in the third quarter of 2021, but gross domestic product for the year had increased 4.9%, ahead of most countries. New Zealand’s consumer price index also jumped 5.9% for the year to December 2021, a level not seen since 1990.
The New Zealand share market fell over the quarter, returning -1.7%. Contributing to the decline were multiple domestic interest rate hikes, with the RBNZ raising the official cash rate twice during the quarter (to 0.75%). Stocks were also impacted by the discovery of Omicron, rising bond yields and a sharp drop in third-quarter retail sales data. Limiting the decline was a series of encouraging domestic earnings results, news the unemployment rate fell to an all-time low of 3.4% in the September quarter and further corporate activity. At the sector level, information technology was the worst performer, followed by consumer-related names and utilities. In contrast, energy, financials and real estate all posted good gains.
New Zealand fixed income
The New Zealand bond market fell over the quarter, returning -1.7%. Domestic long-term government bond yields rose (prices fell) after the RBNZ raised interest rates for the first time in seven years. Bonds were also impacted by a series of encouraging domestic earnings results and record low unemployment. However, the market did find some support following the discovery of Omicron. The yield on New Zealand 10-year government bonds closed the quarter 30 basis points higher at 2.4%. Meanwhile, credit markets were relatively flat, with spreads only slightly wider over the period.
New Zealand dollar
The New Zealand Trade-Weighted Index fell over the quarter, driven in part by US rate hike expectations and disappointing Chinese growth. Limiting the currency’s decline was another round of positive earnings updates and encouraging third-quarter jobs figures. The NZD fell 1.4% against the Australian dollar, 1.0% against the British pound and 0.6% against the US dollar. It rose 2.2% against the Japanese yen and 1.8% against the euro.
How did markets affect UniSaver’s investment options?
After yet another traumatic year for so many, members that have stayed the course with their investments should feel reasonably pleased with the level of returns. The conservative option delivered a return of 2.6% for 2021, while Balanced and Growth delivered 8.7% and 13.3% respectively.
There are undoubtedly further significant challenges and market volatility ahead. As ever, we recommend that members focus on the long term when thinking about their retirement plans, balancing the discomfort of short-term volatility with the prospect of positive returns over the longer term.
The post-lockdown recovery remains intact, albeit at a slower pace and against a backdrop of uncertainty over what happens next; particularly around the outlooks for monetary policy and inflation. Whilst the spike in inflation has been larger than expected, we maintain our view that it will be transitory. Therefore, even though the Fed has begun reducing its asset purchases, we don’t expect global interest rates to rise before 2023.
The strong business cycle gives us a preference for equities over bonds for at least the next 12 months, despite expensive valuations. It also reinforces our preference for the value equity factor over the growth factor, and for non-US equities over US equities. Emerging markets should continue to benefit from an acceleration in vaccine rollouts and policy easing in China.
For fixed income assets, government bonds remain expensive. We believe yields will rise as economic growth improves and central banks look to taper their asset purchases. In terms of credit, we still view high-yield and investment-grade debt as expensive; though both should continue to benefit from an environment of improving corporate profits and low default rates.
In the currency space, we expect the USD to weaken in the near term as global growth leadership rotates away from the US in favour of Europe and other developed economies. Economically sensitive ‘commodity currencies’ like the Australian, New Zealand and Canadian dollars still have room to strengthen, though these are no longer undervalued from a longer-term perspective.
Moving forward, near-term risks include the Delta and Omicron (or similar) variants proving resilient to vaccines and/or an escalation in infection rates during the Northern Hemisphere winter. Other watchpoints include inflation (and central banks’ responses) and a sharper-than-expected slowdown in China; though Beijing has already signalled that more stimulus is on the way.
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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 S&P/NZX 50 Index with imputation credits
 Bloomberg NZ Bond Composite 0+ Yr Index
 The trade-weighted index for the NZD is an indicator of movements in the average value of the NZD against the currencies of our major trading partners.
 Returns net of fees and tax at 28%.