April wrap up - a soft month

Read the ASB Investment Team's monthly wrap up on markets and what it means for your ASB KiwiSaver Scheme investment.

After a buoyant first quarter for growth assets like shares, markets slipped backwards in April.  The US S&P 500 share market index, as an example, was down 4.2% in US dollar terms. The news wasn't any better for fixed income assets with rising long term interest rates inflicting capital losses.

New Zealand ten-year yields were up 0.36% over the month with the S&P/NZX NZ Government Bond Index falling 1.4%, as an example. It was the double whammy of lower economic growth and sticky inflation that delivered the blow to the market. This combination of low growth and higher inflation is reminiscent of the 1970s stagflation era. The 70s were a challenging time to be an investor. Are we in for a repeat of that lost decade? While we think it unlikely, being prepared is wise. Investments in gold and our active approach to managing your portfolio's exposure to different asset classes are two ways we can protect your wealth should that happen.

With weaker economic growth and higher than expected inflation outcomes some commentators have drawn parallels with the stagflation of the 1970s. Stagflation occurs when there is an extended period of weak economic growth, high unemployment and persistent inflation.  

Stagflation is, and should be, a scary word for investors. The 70s were a lost decade for share and fixed income markets with both asset classes generating poor after inflation returns. 

While unemployment isn't a global challenge today the most recent economic data releases tick the lower growth, higher inflation boxes. Are we due for a repeat of the 70s? 

Jamie Dimon, the well-regarded CEO of JP Morgan Chase Bank in the US puts it well, noting that we should be concerned about the risk of stagflation but that at this stage he remains "hopeful" for a soft economic landing in the United States. This perspective is supported by the current low unemployment rate and what has been, at least to date, healthy consumer spending. 

While it's not his or our central view that we will experience stagflation, his warning is worth heeding. With governments around the world running large fiscal deficits, trends towards more trade barriers being erected, which reverses an important factor that had reduced inflation, and conflict in the Middle East and Eastern Europe, the stagflationary risks are there. 

One of the key challenges in building an investment strategy is that the future is never truly known. At any time a number of differing scenarios, with differing impacts on markets, could eventuate. 

While we don't feel that a return to the 1970s investing environment is imminent - we will keep the flares and the 70s fashion firmly in the closet - being cognisant of the possibility of it happening is important. 

We have two primary tools in our arsenal to protect your wealth should that scenario play out. 

Gold and Commodities - the best performing assets over the 1970s were commodities including oil, gold and industrial metals. Having an allocation of gold and industrial commodities, via select listed companies, in your portfolio (except the NZ Cash Fund) has not only aided returns in the past 12 months, gold, for example, is up 21% in New Zealand dollar terms, but we believe it will further protect portfolios should we get a rerun of that "70s show." 

Active asset allocation - while the 1970s were tough, on average, for share and fixed income investors, performance was variable throughout the decade. Some years posted solid returns; others were negative. Having a well-defined process to move portfolio allocations between shares, fixed income, cash and commodities is an important way we can better position portfolios to meet the challenges of different economic and market environments, including the dreaded, but hopefully unlikely, stagflation. 

Hoping for the best, yet being prepared for the worst is an important mindset when managing your money and is something baked into how we operate at ASB. 

This material provides general information only. This material is not a financial product recommendation or an offer or solicitation with respect to the purchase or sale of any financial product in any jurisdiction.

Interests in the ASB KiwiSaver Scheme and ASB Investment Funds (Schemes) are issued by ASB Group Investments Limited, a wholly owned subsidiary of ASB Bank Limited (ASB). ASB provides administration and distribution services for the Schemes. No person guarantees interests in the Schemes. Interests in the Schemes are not deposits or other liabilities of ASB. They are subject to investment risk, including possible loss of income and principal invested. For more information see the ASB KiwiSaver Scheme Product Disclosure Statement or the ASB Investment Funds Product Disclosure Statement available from this website and the register of offers of financial products at www.disclose-register.companiesoffice.govt.nz (search for ASB).