September Wrap Up: When currency changes the picture

September showed how the same market movement can have very different effects. A weaker Kiwi dollar made overseas travel more expensive but lifted the New Zealand-dollar value of many global investments, while higher interest rates and mixed returns across local assets reinforced the importance of looking beyond short-term market noise and staying focused on long-term changes.

If you've been pricing an overseas holiday for summer, September's fall in the Kiwi dollar won't have helped. But that same weaker dollar may have given your investment portfolio a lift.

It's an odd position to be in: your overseas spending money buys less, while your overseas investments can be worth more in New Zealand dollars.

That contrast caught my attention in September. Interest rates moved higher, global share markets remained relatively resilient, and currency made a substantial difference to the returns New Zealand investors saw.

Global equities were a good example. The MSCI World Index fell around 1.2% in US-dollar terms in September, while the S&P 500 slipped around 0.3%. But for New Zealand investors, currency changed the picture considerably. The MSCI World Index returned around 3.5% in NZD terms over the month.

The difference was the Kiwi dollar. The bird had a rough month, falling around 4.6% against the US dollar and losing ground against other major currencies. That helped investors holding global shares with unhedged currency exposure. Those with hedging, which aims to reduce the impact of exchange-rate movements, didn't receive the same boost. Of course, when the Kiwi strengthens, the effect can go the other way.

The New Zealand share market had a softer month. The S&P/NZX 50 Gross Index fell around 0.6%, while New Zealand government bonds posted -1.2% (as measured by the Bloomberg NZ Govt Bond All Maturities Index). Listed property also struggled, falling around 2.1% over the month (S&P/NZX All Real Estate Industry Gross).

And while the weaker dollar may put a dent in overseas holiday budgets, it could encourage some people to spend their summer closer to home, supporting local businesses. The same move can create winners and losers well beyond investment portfolios.

September was also a reminder that markets rarely move for just one reason. Higher interest rates, changing expectations for growth and inflation, geopolitics and rapid technological change are all pulling in different directions.

That can make the short-term picture noisy. It's why we need to pay attention to what's happening now without letting the next data release or central bank decision dominate our thinking.

Sometimes the more important story is what's happening beneath that short-term noise. That brings us back to the mega forces we've discussed before: the big, long-term changes that can reshape economies and markets over many years.

Technological change, for example, can alter how businesses operate and where they invest. Its significance extends well beyond a single month's share-price movements.

For investors, that means looking beyond what markets are doing today and thinking about how those changes could affect the investments we hold.

One month never tells the whole story. Rates can rise, currencies can fall and different parts of a portfolio can respond in very different ways.

As markets change, so too will the opportunities available to investors. The key is to stay focused on the long term, while being willing to revisit our assumptions as new evidence emerges.

Mat Young
HO Asset Management, ASB