Market update - October 2021

22 October 2021 / Published in Your Money

Market update - October 2021

Over the past 18 months, it's easy to see why many of us have had the odd anxious moment when gazing at the latest news headlines - packed as they are with tales of strained health systems, ecological challenges, and political upheaval around the globe.  

Having spent much of 2021 in an optimistic mood, financial markets became somewhat jittery towards the end of the third quarter and into early October.  After hitting record highs at the beginning of September, major global sharemarket indices lost some ground in late September/early October. For perspective though, the recent volatility is minor compared to the major decline we saw in sharemarkets in the first quarter of 2020. In late October, key US sharemarket indices are back around their all-time highs.

Global sharemarket returns over the full quarter were mixed. For example, the US S&P 500 index of US shares slipped 4.8% in October but was up 0.2% over the third quarter. At the start of the fourth quarter, the US sharemarket benchmark is down slightly from its record peak set in September, but up significantly on the lows we saw last year. In contrast, the Japanese sharemarket posted very strong gains over October and ended the quarter up around 2%. In sum, the contribution to investment returns from global shares for the quarter was flat, but very strong over the twelve-month period. 

The New Zealand sharemarket has been playing catch up, and made a strong positive contribution to investment returns over the third quarter, but a smaller (but still positive) contribution to annual returns. The New Zealand sharemarket set an all-time high back in January, only to ease off that peak over the subsequent months. The local sharemarket at one stage was over 10% below the January peak. The third quarter strength (the NZ50 Gross index was up 4.9% in the third quarter) means that at the start of the fourth quarter, the local sharemarket is back trading circa 4% off that January high. 

All these sharemarket developments contribute to overall returns within the diversified ASB KiwiSaver Scheme funds. Overall, it's been a rewarding 24 months for investors with sharemarket exposure who stuck with their long-term plans, despite the ups and downs since the start of last year. 

In times like that, getting good advice about money always proves its worth. You can also check out our latest blog for ways to seek financial advice and how it could help boost your KiwiSaver savings. 

The returns from NZ cash investments have been very low over recent years and this has impacted the KiwiSaver Scheme's Cash fund. Term deposit and mortgage interest rates have begun lifting off the all-time lows earlier this year. This is an encouraging reflection of the ongoing economic recovery taking place in New Zealand, despite the latest COVID-19 setbacks. The RBNZ's confidence in the outlook led it to halt its bond purchase program during the quarter and raise the Official Cash Rate (OCR) from 0.25% to 0.5% for the first time in over seven years in October. We expect more OCR increases from the RBNZ.

The sell-off in global bond markets that we have mentioned in earlier reports resumed over the third quarter of 2021. Long-term bond yields lifted both here and abroad, as investors priced in higher inflation over the year ahead, and the prospect of more central banks following the RBNZ's lead and raising their targeted interest rates. Yields are significantly higher than a year ago, and this impacts the value and return on bonds held within the ASB KiwiSaver Scheme funds. Even 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 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 and are really focussed on the medium to long-term when making investment decisions. Developments over the past quarter have been a headwind for gains in the short term. However, when we look across all the diversified funds, we remain pleased with the gains made since the pandemic started. Investors who have stuck with their savings plans, even whilst there has been some uncertainly and volatility to endure, have recorded positive gains over the past year and beyond. 

If you want to read more about some of these investment market themes, check out the latest ASB Markets Monthly report. You can also check out our ASB Investment podcast for market insights on the go.

If you'd like to know more about the largest investment 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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