Key market movements - June 2021

The second quarter of 2021 again saw generally positive returns for riskier assets. Many developed nations saw falling rates of Covid-19 infection, resulting in a loosening of restrictions which helped propel economic output and consumer spending. These, in turn, strengthened the outlook for future economic growth and pushed markets higher.

Although the global supply chain remains stretched (e.g. new car production has been held back by a global semiconductor shortage), corporate reporting and economic indicators through the quarter were generally positive and in line with market expectations.

Fears of runaway inflation dominated the headlines early in the quarter. The reopening of economies following the relaxation of lockdowns in the US in particular, unleashed pent up consumer demand. Coupled with a generally higher supply of money through government spending programmes, and very low interest rates, this spike in demand quickly translated into higher prices. Central banks largely signalled they expect this inflationary pulse to be transitory, rather than a significant and persistent issue.

 

International shares

+7.6% (hedged to NZD) +7.7% (unhedged)

The US’s flagship S&P 500 Index (total returns in USD) enjoyed another strong quarter, advancing +8.5% for the quarter for a remarkable +40.8% return over the past 12 months.

In Europe, share market performance was also very strong. The MSCI Europe ex UK Index (in local currency) gained +7.1% through the quarter led by Switzerland (+10.0%) and France (+8.6%). The MSCI Europe ex UK Index has gained +30.3% over the last 12 months.

British shares were also strong, although did not increase at the same rate as their neighbours. In GBP terms, the FTSE 100 advanced +4.8% for the quarter, with most of the gains generated in April and May as concerns about the delta variant began to weigh on growth expectations in June.

Japanese equities lagged developed markets peers, as their state of emergency continued until late June. With the Tokyo Olympic games set to commence 23 July, these protective measures were considered a necessity. The MSCI Japan Index increased by +0.2%.

The performance of small capitalisation companies generally lagged larger companies in the quarter, although still held the upper hand over the last 12 months. Economically sensitive industries such as telecommunications and energy were among the best, while utilities struggled. The real estate sector enjoyed a good quarter after generally lagging since the emergence of Covid in early 2020.

In New Zealand dollar terms, the MSCI World ex Australia Index delivered a quarterly return of +7.6% on a hedged basis and +7.7% unhedged. The rolling 12 month return for the New Zealand dollar hedged index was +36.2%, while the unhedged index gained ‘just’ +28.3%.

Source: MSCI World ex-Australia Index (net div.)

 

Emerging Markets shares

+5.0%

Emerging market equities generated gains as well, albeit lower than developed markets. A relatively strong US dollar and the prospect of increasing interest rates also had a negative impact, as most companies in these nations issue debt in US dollars. Both of these contribute to increasing debt servicing costs, which will impact profits.

In spite of these impediments, most emerging share markets delivered gains. Brazil and Russia were the best performing as the recovering global demand for oil pushed crude prices up, enhancing profit expectations for companies (and countries) more exposed to this sector. Korea, Taiwan and India all had middling gains, while China lagged the group as internal regulators increased scrutiny on many of the larger companies there.

In unhedged New Zealand dollar terms, the MSCI Emerging Markets Index produced a quarterly return of +5.0%, for a +30.5% return over the last 12 months.

Source: MSCI Emerging Markets Index (gross div.)

 

New Zealand shares

+0.9%

Domestic equities again lagged other markets through the quarter, with the broad S&P/NXZ 50 Index returning +0.9%. This result was directly due to a relative underperformance of the larger companies on the exchange.

a2 Milk continued its recent slide, down -25% for the quarter and now a phenomenal -70% lower than its share price high of only 12 months ago. Other large companies Ryman (-13.3%), Auckland Airport
(-7.1%), and Air New Zealand (-7.2%) struggled, with their corporate earnings announcements generally falling short of market expectations. Air New Zealand continues to battle in this challenging environment and is clearly hampered by the lack of clarity about the prospects for a general reopening of our border.

At the other end of the spectrum, Contact Energy (+18.2%) saw positive price action as their clean energy solutions stimulated investment inflows from foreign investors and, along with Mainfreight (+10.9%) and Infratil (+10.1%), managed to keep the index in the black.

Source: S&P/NZX 50 Index (gross with imputation credits)

 

Australian shares

+6.8%

Australian share market returns were strong over the quarter. The S&P/ASX 100 (the largest 100 companies in the Australian market) and the S&P/ASX Small Ordinaries Index (the companies ranked 101 to 300 in the Australian share market) both returned +8.5% in Australian dollar terms. Over the last 12 months small capitalisation companies have been a bit stronger, with the S&P/ASX Small Ordinaries Index up +33.2% versus +27.9% for the top 100 companies.

Among the top performers were Rio Tinto (+14.4%), which benefited from continued increases in global demand for the industrial metals it mines, and Commonwealth Bank (+16.0%), who is set to write more (and larger) loans due to a strong rebound in the Australian residential property market.

Returns to unhedged New Zealand investors were slightly reduced by a small depreciation in the Australian dollar over the quarter.

Source: S&P/ASX 200 Index (total return)

 

International fixed interest

+0.1%

Of interest was how the US Federal Reserve would react to increasing inflationary pressures. The US consumer price index had been persistently low following the global financial crisis in 2008. This year, however, due to the economic resurgence brought about by the reduction in many Covid restrictions, prices have been trending upwards and inflation clocked in at +5% for the year ended May 2021. This was the largest 12 month increase since 2008.

The fiscal stimulus pumped into the economy (relief packages) and record low interest rates have resulted in consumers having access to more money, and – with restrictions relaxing – a greater inclination to spend it. Add in some supply side constraints (raw material shortages, shipping delays etc), and prices for many goods have been squeezed higher.

In the short term, central banks have sought to stimulate an economy wounded by Covid, but in the long term, the management of inflation risks will increasingly be their focus. The US Federal Reserve has kept its official interest rate at the current record low but signalled an expectation to raise interest rates sooner than previously expected.

This announcement caused shorter term yields to spike – the US 2 year yield rose to 0.25% from 0.16%, where it has been sitting since the crisis began. The longer term US 10 year yield actually declined from 1.74% to 1.47%, as the notion that above target inflation in the future might be tolerated was quashed in the Federal Reserve’s June update.

Broadly, this meant longer duration bonds outperformed shorter duration bonds. Credit spreads narrowed and are now on average tighter than pre-Covid levels, helping corporate bonds outperform government bonds.

The FTSE World Government Bond Index 1-5 Years (hedged to NZD) made +0.1% for the quarter and the same return over 12 months. The broader Bloomberg Barclays Global Aggregate Bond Index (hedged to NZD) returned +1.0% for the quarter but is flat over the 12 months to the end of June.

Source: FTSE World Government Bond Index 1-5 Years (hedged to NZD)

 

New Zealand fixed interest

+0.3%

With an eye to its dual mandate of stable 2% inflation and maximum sustainable employment, the Reserve Bank of New Zealand (RBNZ) again elected to leave the Official Cash Rate (OCR) at 0.25%. With inflation nearing the mid-point of the target 1% - 3% range, and the unemployment rate having pulled back to 4.7% (very near to pre-lockdown levels), it is easy to conclude the existing policy settings are fulfilling those objectives. In its most recent announcements, the bank has signalled an expectation of hikes in the OCR commencing as soon as this year, and continuing through to a level of around 2% in 2024.

Yields in New Zealand were relatively unchanged through the quarter. The New Zealand 10 year yield closed the quarter at 1.80%, 0.04% below its starting point, which meant very small gains for this asset class this quarter.

Government bonds underperformed corporate bonds, while longer maturity bonds outperformed shorter maturity bonds, but generally all parts of this asset class posted negligible returns through the quarter.

The S&P/NZX A-Grade Corporate Bond Index rose +0.3% for the quarter and is the only asset class with a negative 12 month return, at -1.2%. Longer term performance remains robust, with both the 3 and 5 year annualised average returns coming in at +3.7% and the 10 year return at +4.9% per annum.

The longer duration, but higher quality, S&P/NZX NZ Government Bond Index rose +0.2% for the quarter but has retreated -3.6% over the preceding 12 months.

Source: S&P/NZX A-Grade Corporate Bond Index

 

 

Table 1: Asset class returns to 30 June 2021

Asset class	Index name	3 months	1 year	3 years	5 years	10 years
New Zealand shares	S&P/NZX 50 Index (gross with imputation credits)	+0.9%	+11.2%	+13.2%	+14.0%	+15.2%
Australian shares	S&P/ASX 200 Index (total return)	+6.8%	+28.2%	+8.9%	+11.8%	+7.2%
International shares	MSCI World ex Australia Index (net div., hedged to NZD)	+7.6%	+36.2%	+13.8%	+14.9%	+12.8%
	MSCI World ex Australia Index (net div.)	+7.7%	+28.3%	+13.9%	+15.4%	+12.7%
Emerging markets shares	MSCI Emerging Markets Index (gross div.)	+5.0%	+30.5%	+10.5%	+13.9%	+6.4%
New Zealand fixed interest	S&P/NZX A-Grade Corporate Bond Index	+0.3%	-1.2%	+3.7%	+3.7%	+4.9%
International fixed interest	FTSE World Government Bond Index 1-5 Years (hedged to NZD)	+0.1%	+0.1%	+2.5%	+2.1%	+3.4%
New Zealand cash	New Zealand One-Month Bank Bill Yields Index	+0.1%	+0.3%	+1.0%	+1.4%	+2.1%

Unless otherwise specified, all returns are expressed in NZD. We assume Australian shares and emerging markets shares are invested on an unhedged basis, and therefore returns from these asset classes are susceptible to movement in the value of the NZD. Index returns are before all costs and tax. Returns are annualised for time periods greater than one year.

 

For a detailed review of the market commentary for the quarter, see ‘Market commentary - June 2021' or click here to view the full newsletter in PDF.

 

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