August Wrap Up - Volatility? What volatility?

August was an incredible month for markets. Shares plunged, volatility spiked, shares rose again, and volatility plummeted. Central banks cut interest rates and pointed to further rate cuts. It was all on. When the dust settled US shares ended the month up 3.4% (as measured by the S&P 500 in USD terms), New Zealand shares up 0.3% (NZX50). Interest rates fell, delivering gains for conservative investors. The only dark cloud for kiwi investors was a strong New Zealand dollar blunting the gains on international shares when translated into NZ dollar terms.

We talked last month about being at a turning point in market sentiment. Our response to that is to broaden portfolio exposure pivoting toward assets that have struggled over the last couple of years and that have attractive characteristics. Listed infrastructure ticks both of those boxes. We are adding an exposure to our core, diversified funds within the ASB KiwiSaver Scheme and ASB Investment Funds.

This was not a normal month. Early in the month shares plunged and measured volatility, the market's expectation of future return variability, spiked. There were three main factors causing this, with a partial unwind of the Japanese yen carry trade, investor nervousness about technology shares and weaker economic data in the United States all to blame. With two out of the three of these, yen carry and technology share position unwinds, short term in nature, we did think the market would find its feet, but the speed of the turnaround was breathtaking.

At its worst, for instance, the US share market was flirting with correction territory, down 8.5% (S&P 500) in early August, and expected volatility three times the levels that had prevailed just prior to the shock. It was a violent sell-off. A cessation of the shorter-term influences as traders quit positions and an expectation, clarified in the Jackson Hole central bank conference late in the month, of US Federal Reserve interest rate cuts came to the rescue. By month end the US share market was in positive territory with the S&P 500 flirting with new all-time highs and with expected volatility falling more rapidly over a six-day period than ever before in history. It was like nothing had happened earlier in the month!

The New Zealand share market was much more muted still suffering an intramonth sell off but finishing flat supported by a strong F&P Healthcare profit result and a Reserve Bank interest rate cut.

Weaker economic growth in the US and expectations of interest rate cuts there soured the market’s desire to hold US dollars. The flip side of this is that the kiwi dollar rallied strongly against the greenback, up 5.4% for the month. The kiwi dollar also performed well, although not as strong, against other currencies including the yen, euro and pound.

This is mixed news for investors. A stronger kiwi dollar is good for our global purchasing power, meaning our wages can buy more overseas, but it is not so good for the foreign currency denominated assets in our funds. A rising kiwi dollar means the value of these foreign currency assets falls, hurting returns.

With the kiwi dollar so strong for the month this marginally dragged overall returns for our two most growth-oriented fund options* into negative territory.

In last month's commentary we talked about the importance of being dynamic in managing your money, adjusting the funds as markets, economies and prices change. We highlighted an opportunity in listed infrastructure that we were considering. We have concluded that this is a smart call with listed infrastructure to be added to the core, diversified funds. 

Listed infrastructure is a diverse asset class investing in the key assets that run our economy including railroads, airports, cell phone towers, communication networks and electricity utilities.

It is an attractive asset class:

1. Inflation protection - infrastructure asset cashflows tend to be more resilient and grow in times of higher inflation. While the post covid inflation shock seems to be behind us, fingers crossed, we still believe that inflation will be on average higher than it has been in the past few years. Inflation-resistant assets are a valuable portfolio addition. 
2. Energy transition - as we move to a low-carbon world there are opportunities in the infrastructure space to generate outsized returns and manage climate transition risk. This adds appeal to the asset class.
3. Improved diversification - we have highlighted in previous monthly reports the incredibly strong performance of technology shares and the rise and outperformance of the so called magnificent seven stocks. This has taken the weighting of these shares to very high levels in US and global share market indices. With the US Federal Reserve beginning a rate cut cycle and the valuations of technology companies looking full, at the very least, we are of the view that broadening market exposure makes sense. Adding listed infrastructure helps achieve additional diversification in share portfolios. 
4. Better returns - our investment partner BlackRock regularly assesses the return outlook for different asset classes. Listed infrastructure has risen to the top of this table with future expected returns in excess of global and domestic shares. We like better expected returns on lower risk assets! 

The time is right to add listed infrastructure to portfolios. 

*ASB KiwiSaver Scheme Aggressive Fund and ASB KiwiSaver Scheme Growth Fund.

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).