Market update - May 2021
When KiwiSaver balances dip, people usually look to the sharemarket for an explanation. All the ASB KiwiSaver Scheme funds apart from the NZ Cash Fund have exposure to both local and offshore sharemarkets, and sharemarket dips, like we saw around a year ago, can quickly flow through to investors' balances. The other thing that usually happens is that growth funds with the greatest exposure to shares normally dip the most, while the conservative funds tend to chug along with steadier returns.
Looking at ASB’s KiwiSaver Scheme returns over the first quarter of 2021 shows a different story. The Growth and Balanced funds are up over the first quarter, but the Conservative and Moderate funds are down.
This time around it’s mainly what’s going on in the bond, or fixed interest, markets that’s creating the negative returns; global sharemarkets actually performed well over the quarter. Long-term bond yields (the return that a bond pays over its life) have been on the rise as investors price in an improving economic outlook for 2021 and beyond. Investors are starting to think a bit more about the risks of inflation over the next few years as economies pick up too.
Long-term bond yields in New Zealand, Australia and the US touched all-time lows in the third quarter of 2020 but lifted off those lows as sentiment improved over the fourth quarter of 2020 and the first quarter of 2021. Bond values move in the opposite direction to yields, so the lift in yield observed over the past two quarters has led to modest declines in the value of government bonds both here and offshore (Explained: if there are more sellers of a particular bond than buyers, that will mean the yield will increase and the price of it will decrease).
Many corporate bond values have also dipped over the quarter due to rising yields. Diversified investments at the conservative end of the scale (Such as the ASB KiwiSaver Scheme’s Conservative and Moderate funds) have the greatest exposure to bonds, or fixed interest, and that’s why they are down (Explained: the decline in value for these parts of the funds is mainly due to bond values declining).
Global shares are trading around all-time highs, and that’s been a positive offset to the above – and the reason why the Growth and Balanced funds have had a stronger start to the year. The local sharemarket however, was down over the first quarter, and that has also been a headwind for investors recently, along with what’s going on in the NZ and global bond markets.
The mixed returns from the local and global markets is the reason we diversify – the underlying assets we invest in don’t always go up (or down) at the same time.
There's plenty of moving parts in the investment world these days. If you want to read more about some of these issues, check out the ASB Markets Monthly – we’ve just posted a new report for the month of April and it was pleasing to see the local sharemarket lift after the weakness at the start of the year.
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.
The slightly unusual mix of conditions and dips observed in the Conservative and Moderate funds doesn’t mean something’s wrong, or you necessarily need to do anything. 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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