The information below is an overview of what happened in the markets in which the ASB Superannuation Master Trust was invested over the quarter to 30 June 2016.
Brexit was the word on everyone’s lips during the second quarter of 2016, as the UK’s decision to leave the EU caught the market off-guard. This generated extreme volatility at the end of the quarter, with foreign exchange markets, particularly the Great British Pound (GBP), seeing major movements. Despite the additional volatility, the move towards risk aversion was not nearly as large as some expected and the UK’s FTSE100 share index only took a few days to recover from the shock and move back above pre-Brexit levels.
In New Zealand, the Reserve Bank of New Zealand (RBNZ) left the official cash rate (OCR) unchanged at 2.25% as they remain wary on what impact another cut may have on the housing market. Recycled language in its communications, suggest more cuts are on the way, although the market still appears to be debating the timing that these will occur. The RBNZ also hinted that more fiscal stability measures could be introduced to calm the market. Such macro-prudential measures did not make an appearance in the second quarter though, and the housing market (particularly in Auckland) continued to heat up.
The Gross Domestic Product (GDP) from quarter one was released, coming in slightly firmer than expected. The growth rate of 0.7% quarter-on-quarter (seasonally adjusted) beat the 0.5% consensus forecast but was still slower than the 0.9% seen in the final quarter of 2015. The annual measure lifted from 2.3% to 2.8% and we continue to expect slow, but steady growth in the coming few quarters. This view was shared by the Government’s Budget, released in June. With no great changes being delivered (none were expected in a pre-election year), it’s very much business as usual for New Zealand.
Global dairy prices posted modest rises over the quarter, but still remained around a third lower than their long-run average. Although prices continue to remain low, we anticipate the excess of global dairy supply is starting to reduce – and this should begin to support global dairy prices over the remainder of 2016. Turning to Fonterra’s milk price forecasts, in May Fonterra estimated the 2015/16 season milk price at $3.90/kg and also set its opening forecast for 2016/17 at $4.25/kg.
Elsewhere, the Reserve Bank of Australia (RBA) surprised the market with a 25bp rate cut at the start of May as they responded to very soft inflation data. However, the final two months of the quarter saw Australian economic data, including GDP, coming in generally better than expectations. As such, further easing did not arrive from the RBA and the potential for more cuts in the near future is limited.
Further afield, the US Federal Reserve (Fed) left rates unchanged in response to May’s low employment growth and concerns about the risks around the Brexit event. Despite this, the general tone of the Fed Officials through the second quarter was fairly upbeat, with many external forecasters looking for two 0.25% hikes in 2016.
In both April and June the RBNZ declined the opportunity to extend the easing cycle following March’s surprise 0.25% OCR cut. The June meeting was a close call, with economists and market participants alike split in the run up to the decision. The hot Auckland housing market continues to cause the RBNZ problems especially as the impact of Auckland house-lending restrictions that were introduced last year appear to be fading. The lack of further rate cuts has been one of the factors driving the appreciation of the New Zealand dollar, leaving the RBNZ in a very difficult position.
The yield on bank bills and other short-term financial instruments fell during the quarter with the cash benchmark, S&P/NZX 90-Day Bank Bill Index returning 0.59% and 2.89% over the past year.
Local bonds continued to see declining yields through second quarter of 2016, as speculation over more policy easing continued in the market. The impact of this speculation was only partly offset by the RBNZ holding the OCR steady at both meetings. In addition, international uncertainty generated demand for assets which investors perceive as less-risky (including government debt) which created additional downward pressure on yields. Over the period, the yield on the 5-year NZ Government bonds declined 0.24% from 2.27% to 2.03%, adding to the 0.73% drop in we saw in the first quarter. The 10-year NZ Government bond yield also declined significantly falling from 2.93% to 2.35%, a decline of 0.58%.
Given the inverse relationship between bond price and bond yields, the fall in yields was positive for bond portfolios. The S&P/NZX NZ Government Bond Index returned 2.15% over the quarter and 8.04% over the year, while the S&P/NZX A-Grade Corporate Bond index returned 1.47% over the quarter and 6.20% over the year.
Global bond prices continued to climb as yields fell over the second quarter, extending the trend that was seen at the start of the year. Falling yields increased the number of bonds now holding negative yields, especially in Europe and Japan. Risk aversion has been a big driver of lower yields, and was particularly evident in the final week of the quarter as the UK’s decision to leave the EU was digested and markets grappled with the potential consequences. In addition, central banks are still poised to add to global stimulus, further pushing yields lower. In the US, although the Fed has begun a gentle tightening cycle, the pace and size of any moves have been revised lower. Lower yields and a flight to safety both provided positive support for bond returns with the Citigroup World Government Bond (3-5 years) lifting 1.46% over the quarter, the Citigroup World Broad Investment Grade Bond Index (excluding securities in the Citigroup World Government Bond Index) lifted 2.53% and the CitiGroup World Inflation Linked Securities (1-10 years) Index up 1.97%.
Global property shares lifted over the quarter, building on momentum we have seen in recent times. Global property shares continue to outperform many other asset classes monitored. Historically-low interest rates are continuing to boost demand for property and global uncertainties continue to fuel some investors’ preference for “bricks and mortar”. The FTSE EPRA/NAREIT Developed Rental Index (100% hedged to NZD) was up 4.04% over the quarter, and 16.09% over the year.
Australasian share markets lifted over the second quarter of 2016, with the New Zealand market continuing to build on the strong start to the year. The S&P/NZX50 (with imputation credits) Index lifted 2.29% over the quarter and has seen a return of 21.89% over the past year. Following the surprise rate cut from the RBA in May, the NZD strengthened against the AUD by 5.97% during the period (closing close to 0.96 by the end of the quarter). Although the S&P/ASX 200 Index declined 1.92% in NZD terms throughout the quarter, the 100% hedged S&P/ASX 200 Index lifted 3.99% showing the benefits of hedging when the NZD appreciates.
The second quarter of the year was a mixed period for global equities, although it was somewhat more positive than what we saw in the first quarter of 2016. The Brexit event at quarter end caused uncertainty in the market which lead to significant volatility. UK markets fell significantly immediate post the Brexit decision although the FTSE100 bounced back and managed to lift 5.33% throughout the quarter (in GBP). Broader European share markets suffered during the quarter and the MSCI Europe (ex UK) index closed the quarter down 0.32% to take the total return for the year to -11.57% (in EUR terms). The S&P 500 index of US shares gained 1.90% in the quarter with a return of 1.73% over the past year. Japanese equities had yet another difficult quarter, with Government and Bank of Japan stimulus failing to dispel the market concerns. The TOPIX index of Japanese shares fell 6.59% over the quarter, and 22.82% over the year (in JPY terms). Overall, the MSCI World Index (ex-Australia) 100% hedged to NZD lifted 1.99% over the quarter but has declined 1.64% over the year.
Some of the underlying sectors available through the Superannuation Master Trust invest internationally. This means that currency movements will affect the performance of these investments in NZDs. To reduce the impact of currency movements, the manager may hedge to NZDs from time to time in respect of the international investments.