Strong returns from global shares
by Russell Investments
Global share markets continued to march higher during the quarter as ongoing fiscal and monetary policy support combined with optimism that an acceleration in global COVID-19 vaccinations would sustain the economic and market recovery. Economic data has been strong, reflecting the sharp recovery since the lockdowns of 2020.
The US economy expanded at a 6.4% annualised pace during the March quarter, which followed 4.3% growth rate recorded in the final quarter of 2020. 2021 is on track to be one of the strongest years for US economic growth on record. While the recovery in New Zealand has not been as sharp as experienced by many economies that were locked down for much of 2020, the local economy is forecast to grow rapidly in 2021. Local interest rates have moved higher in anticipation, as investors have turned their attention to the gradual removal of monetary stimulus in New Zealand and the inevitable interest rate rises. At the time of writing, the market is forecasting that the Reserve Bank will raise the official cash rate (OCR) several times over the next year to combat higher than target inflation and in recognition of a strong local economy.
Despite the relatively strong economic performance, the New Zealand sharemarket has trailed overseas sharemarkets in 2021, as investors have fretted about company valuations and the potential impact of interest rate rises. New Zealand shares (as measured by the S&P/NZ 50 Index including imputation credits) advanced 0.9% for the June quarter, but have declined 3% on a year-to-date basis. Global shares gained 7% for the quarter and have returned more than 13% year to date (as measured by the MSCI All Country World Index – New Zealand dollar hedged). Unlike much of last year where the large technology and consumer stocks, like Apple, Alphabet (parent company of Google), Amazon and Microsoft performed strongly, for much of 2021 it has been the shares in the more cylical areas of the market, for instance the energy and materials sectors, that have delivered the strongest performance. The so called ‘re-opening trade’ has been led by shares of companies that are positioned to do well as the economies open up following the mass vaccination programmes.
Global fixed interest delivered a return of 1% (as measured by the Bloomberg Barclays Global Aggregate Bond New Zealand dollar hedged) for the quarter, but the asset class has declined year-to-date as investors began to price in higher interest rates. New Zealand fixed interest was essentially flat for the quarter, but is down almost 3% on the year due to expectations of several interest rate hikes over coming quarters.
After a difficult year in 2020 due primarily to the pandemic, infrastructure and real estate shares, have recoved strongly so far this year, up 6% and 17% respectively (FTSE EPRA NAREIT Developed Real Estate NR and S&P Global Listed Infrastructure on a New Zealand dollar hedged basis). Real estate shares have returned 30% over the last 12 months.
How did markets affect UniSaver’s investment options?
Despite the horrific economic and human toll of the pandemic, investment markets have delivered strong returns in recent times. UniSaver members can reflect on having participated in this growth, the Conservative (+5.8%), Balanced (+16.7%) and Growth (+23.9%) options all delivering strong returns over the last 12 months.
Vaccine rollouts and US stimulus have the global economy on track for a strong rebound in the second half of this year. However, there are fears that vaccine rollouts and US stimulus could see economic growth accelerate too quickly, placing more upward pressure on interest rates. Whilst we agree that economies are poised to rebound sharply as restrictions are gradually lifted, we disagree that inflation pressures and interest rates are likely to increase significantly over the next 12 months.
The strong business cycle gives us a preference for equities over bonds for the remainder of 2021, 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. For emerging markets, valuations are relatively more attractive.
For fixed income assets, government bonds are still expensive, even after the recent sell-off. Central bank policy should limit rises in government bond yields during the recovery. In terms of credit, we view both high-yield and investment-grade debt as slightly expensive; though they remain attractive given the post-vaccine cycle outlook.
After the strong investment results of recent times, UniSaver members should prepare for periods where results are not quite so favourable. While the rapidly improving economy should contribute to strong corporate earnings which bodes well for shares, volatility seems likely to remain elevated as investors react to the news of the days. We remind members that for most, saving for retirement is a long-term journey, so the focus should be on the big picture rather than the day-to-day gyrations of the market.
 Returns net of fees and tax at 28%.