Investment commentary for the period ending 30 June 2010
Sharemarkets continued to suffer from high volatility throughout the month. Increasing sovereign risk (the ability of a country to repay its debt) concerns surrounding EuroZone countries and a weaker-than-expected economic recovery in the US and China saw investors reduce their appetite for risky assets. China's attempt to slow the world's largest emerging economy would dampen global growth. Some commentators now anticipate the emergence of a "double dip" recession.
In the US, housing and consumer confidence were weaker. New home sales fell 33% over May and building consents continued to fall. The recently expired home buyer-credits are no doubt having an impact. This is a recent example of a stimulus measure ending and concerns continue to mount as stimulus measures continue to wind down.
On the positive side, the IMF upgraded its outlook for 2010 global economic growth from 3.9% to 4.2%.
Cash ?
Expectations were for the Reserve Bank of New Zealand (RBNZ) to lift the Official Cash Rate (OCR) and they didn't disappoint. The Reserve Bank has lifted the Official Cash Rate by 25 basis points to 2.75%. This is the first increase in official rates since July 2007, when they were raised to 8.25%. They had been at a record low of 2.50% since April 2009. The Reserve Bank commented that the NZ economy had entered its second year of recovery with growth becoming more broad-based. Economic growth of around 3.5% was expected this year and next, with the main drivers being higher export prices and volume growth, an improving labour market and a pick-up in residential and business investment. Expectations are for further rate hikes in the future and that banks will lift floating mortgage rates accordingly.
NZ Fixed Interest ?
Corporate bond values rose 1.71% and Government bond values rose 1.26% in June as yields fell. Bond markets continue to be supported as investors seek relative safety from selected sovereign debt issues. Bond yields fell as sentiment turned negative and questions remain around the sustainability of the global recovery. With the expectations of further rate increases, short term interest rates will come under pressure.
World Fixed Interest ?
The Citigroup World Government Bond Index returned 0.96% over June. The sharp increase in risk aversion was a result of European debt concerns along with the possible contagion to other EuroZone economies, sharemarket volatility and China looking to slow growth through tightening monetary and fiscal policy. The 10-year government yield in the US fell 35 basis points over the month to a 14-month low of 2.93% while Greece's 10-year yield increased 265 basis points over the month of June alone. The European sovereign debt crisis is perceived as tightening global financial conditions and is less supportive of global economic growth. Expectations are for the major central banks to keep interest rates on hold for the foreseeable future. The US Federal Reserve kept official interest rates on hold at 0%-0.25% and maintained its pledge to keep rates at a record low for an 'extended period' given America's subdued economic recovery.
Global Property ?
The global property sector fell 3.86% in June. The sector came under pressure consistent with global sharemarkets. Focus is starting to shift from reducing debt levels to pursuing growth strategies, which is an important development for the sector.
Australasian Shares ?
The NZ market fell 2.91% and the Australian market fell 2.65% in June. Both markets continued to be impacted by events globally as investors moved out of risky assets. A new prime minister was appointed in Australia with Julia Gillard becoming the first female Australian prime minister. The expectation is that a more miner-friendly resources super profits tax (RSPT) will be introduced. NZ continues to show signs of a broadening recovery taking place. Telstra Corporation and Hallenstein Glasson were the top performers in the NZ market. China's decision to loosen its currency peg to the US dollar could potentially be positive for Australasian exporters as the Renminbi is expected to appreciate.
World Shares ?
World sharemarkets fell 3.6% in US dollar terms in June. Investors have become very nervous as sovereign risk and potential contagion concerns intensified. The EuroZone rescue plan failed to restore investor confidence and the appearance of the economic recovery slowing also had investors concerned. With sentiment turning negative and the sustainability of the economic recovery coming into question, sharemarkets are at crossroads. It's hoped that the US reporting season due to start in July could prove to be a potential catalyst for markets.
Hedging:
Some of the investments available through the FirstChoice KiwiSaver Scheme invest in international investments. This means that currency movements will affect the investment performance of these investments. To reduce the impact of currency movements the manager may hedge to NZ dollars from time to time in respect of the international investments.
Notes:
- NZ Government bonds are measured by the ANZ NZ Government Stock Index.
- NZ corporate bonds are measured by the ANZ A-Grade Corporate Bonds Index.
- World bonds are measured by the Citigroup World Government Bond Index.
- Global property is measured by the UBS Global Real Estate Investors Index. The global property investments in the FirstChoice KiwiSaver Scheme are 50% hedged.
- Australasian shares are measured using the NZX 50 Index for NZ shares and the All Ords Index for Australian shares. The FirstChoice KiwiSaver Scheme uses the S&P/ASX 200 Index as its Australian shares benchmark for tracker funds and the S&P/ASX 300 Index as its Australian shares benchmark for active funds.
- World shares are measured using the MSCI World (ex Australia) Index.
This report is based on information obtained from sources believed to be reliable and accurate at the time of preparation, but its accuracy and completeness is not guaranteed. The information shown on this document does not constitute specific advice to any person. Investors should seek independent advice. Neither Public Trust, ASB Group Investments Limited, ASB Bank Limited, their related companies nor their directors, officers or employees accept any liability whatsoever for any direct or indirect loss or damage of any kind arising out of the use of, or reliance on, the information provided in this report. A copy of the Investment Statement for the FirstChoice KiwiSaver Scheme is available here or by calling
0800 1ST CHOICE (0800 178 246).
