Market update - July 2021
The past eighteen months have been really rewarding for investors who have stuck with their long-term plans, but it's been challenging at times. The major drop in global shares in the first quarter of last year was a particularly stressful time for investors. Since then, we have seen a strong, but uneven recovery in global and local sharemarkets. Local interest rates have lifted off their lows for everything from bank term deposit rates through to government and corporate bonds. Only the shortest-term local interest rates remain at or near their lows, somewhat anchored by the Reserve Bank of New Zealand's (RBNZ) record-low Official Cash Rate (OCR) setting of 0.25% that has been in place since March 2020.
The strength of the local economy means ASB thinks increases to the OCR are not far away. The expected returns from NZ cash investments remain very low but can improve a little as local interest rates gradually rise. Term deposit and mortgage interest rates started to lift off the all-time lows earlier this year as the economy showed more and more signs of strength, and financial markets begin to price in the gradual withdrawal of the emergency interest rate settings that were deployed during the pandemic. This is an encouraging reflection of the ongoing economic recovery taking place in New Zealand.
After two quarters of rising yields, the selloff in global bond markets took a breather over Q2 2021. Long-term bond yields retreated off their recent peaks both here and abroad. Nonetheless, yields remain significantly higher than a year ago, and this impacts the value and return on bonds held within the ASB KiwiSaver Scheme's funds. With all this talk about rising interest rates, we still expect interest rates both here and abroad to remain very low compared with the levels recorded over the past 20 years.
The New Zealand sharemarket set an all-time high back in January, only to ease off that peak over the subsequent months. The sharemarket made a small gain over the second quarter but, at the time of writing in July, is still trading around 6-7 percent of the level reached back in January. In contrast, many of the major sharemarkets around the world have pressed significantly higher, with record highs recorded in the sharemarkets in Australia, the US, and across Europe.
Saying that, the New Zealand sharemarket is still significantly up on where it was a year ago, and that's boosting annual returns for all the diversified funds. The stronger global sharemarket performance is an even bigger driver of positive returns over the past quarter and year.
The mixed and uneven returns from the local and global sharemarkets, and the interest rate developments that are impacting income assets is the reason we diversify – the underlying assets we invest in don't always go up (or down) at the same time. When we look across all the KiwiSaver funds, we are pleased with the strong gains made since the end of Q1 2020 and pleased for all the investors who have stuck with their savings plans.
If you want to read more about some of these investment market themes, check out the latest ASB Markets Monthly report.
If you'd like to know more about the largest bond and company holdings for each of the ASB KiwiSaver Scheme funds, the best place to start is the quarterly fund updates found here.
As always, it's important to make sure you are in the right fund for your circumstances and keep focused on your own savings goals, rather than react to short-term financial market movements.
Written by: Chris Tennent-Brown, ASB Senior Wealth Economist
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