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Key market movements for the quarter

Shares and bonds were under pressure in the second quarter of 2022 as markets priced in further increases in interest rates as well as an increased risk of recession. Among equity returns, which were generally poor, the MSCI World Value index significantly outperformed its Growth counterpart, although both registered double-digit declines. The Chinese share market provided a rare highlight as prolonged lockdowns were lifted in some major cities, allowing macroeconomic indicators to show improvement.

Inflation rates in significant economies persisted at multi-decade highs, with various central banks raising interest rates and others signalling their intention to do so soon. The quarter also saw mounting concerns over global economic growth prospects, with the fight to tame inflation likely resulting in monetary policy settings less supportive than the global economy has enjoyed in recent years.

The potential for economies to experience a recession later this year became more widely contemplated. Towards the end of the quarter, economic indicators began to reflect a general moderating or slowing economic activity.

International shares

-15.1% (hedged to NZD)

-6.9% (unhedged)

In the US, investor focus was on inflation and the policy response from the US Federal Reserve. The Fed enacted initial rate hikes during the quarter and signalled that there would be more to come. Even so, they admitted that bringing inflation down without triggering a recession would be a challenging balancing act.

While weak sentiment affected all sectors, consumer staples and utility companies were comparatively resilient. However, some companies had dramatic declines, most notably in the media, entertainment, and auto sectors.

Further steep declines were expected for eurozone shares as the war in Ukraine continued and concerns mounted over potential gas shortages, with supplies to Germany being a concern. Higher inflation also dented consumer confidence, with the European Central Bank (ECB) poised to raise interest rates in July.

UK equities also fell over the quarter, with economically sensitive areas of the market performing poorly towards the end of the period amid rising recessionary risks.

In New Zealand dollar terms, the MSCI World ex-Australia Index delivered a quarterly return of
-15.1% on a hedged basis and -6.9% unhedged. This meant the rolling 12-month return for the New Zealand dollar hedged index reduced to -12.2%, while the unhedged index was down -4.2%.

Source: MSCI World ex-Australia Index (net div.)

Emerging markets shares


In a quarter where global share markets generally slumped, it was somewhat against the usual trend to see the relative outperformance of the Emerging Markets region (as a whole). When investors are wary of exposure to higher-risk assets, Emerging Markets are often harder hit. But not this quarter.

That said, plenty of emerging markets did post declines. South Korea struggled with financials, and technology and energy stocks were hit particularly hard amid growing fears of a global recession. Taiwan was also significantly less worried that rising inflation and global supply chain problems would weaken demand for its technology products.

The Latin American markets of Colombia, Peru and Brazil were among the weakest in the MSCI Emerging Markets Index. A combination of rising concerns about a global recession, domestic policy uncertainty and weaker industrial metals prices later in the quarter contributed to declines.

The emerging European markets of Poland and Hungary underperformed by a wide margin as geopolitical risks stemming from the war in Ukraine persisted.

The shining light for the region was China which managed to deliver a solid positive return for the quarter. With lockdown measures in certain Chinese cities being eased, this prompted a recovery in economic activity.

As the largest constituent in the emerging markets region, China’s positive result was a significant driver of the mild loss for this asset class in the quarter, with the MSCI Emerging Markets Index producing a quarterly return of -1.6% in unhedged New Zealand dollar terms.

Source: MSCI Emerging Markets Index (gross div.)

New Zealand shares


The New Zealand market endured a problematic quarter, with the S&P/NZX 50 Index returning -10.2%. At the individual company level, the quarter had ‘red ink’ almost across the board. The industrial and health care sectors contributed the most significant drag on the index’s performance.

The two worst affected firms in the industrials sector, Air New Zealand and Freightways were down -27.9% and -25.9%, respectively, for the quarter, as the prospect of weaker economic growth weighed heavily on their prices. Fletcher Building fell 21.0% as sentiment around the domestic building, and construction sector continued to cool.

With only six firms in the top 50 delivering a positive return in the quarter, software firm Pushpay enjoyed the most robust performance, gaining 11.4%. This followed news that two existing shareholders (BGH Capital and Sixth Street) were intending to make a takeover bid for the firm.

Source: S&P/NZX 50 Index (gross with imputation credits)

Australian shares


The Australian share market (S&P/ASX 200 Total Return Index) had a similarly tough time sliding by 11.9% over the quarter in local currency terms. Returns to unhedged New Zealand investors were slightly better at -9.8% due to an appreciation in the value of the Australian dollar over the quarter.

Once again, the dispersion in sectoral returns was a feature of the market, with the utilities and energy sectors standing apart from the rest by delivering small gains. At the other end of the spectrum, the information technology sector suffered an abysmal quarter as growth company valuations came under increasing pressure due to the expectation of faster rate hikes. The real estate and materials sectors were also fragile.

One in ten companies in the ASX 200 delivered positive returns during the quarter. Infrastructure firm Atlas Arteria (+23.1%) and small energy company Viva Energy Group (+23.0%) were the clear standouts.

At the other end of the standings, 21 companies within the ASX 200 delivered returns of -35% or worse for the quarter. This list was littered with small capitalisation firms in the technology and basic materials sectors, as valuation concerns and general negative sentiment during the quarter impacted these companies the most.

Source: S&P/ASX 200 Index (total return)

International fixed interest


Global bonds saw their prices decline during the quarter, with yields markedly higher due to elevated inflation data, increasingly ‘hawkish’ central bank statements and rising interest rates. There was a small bond rally (price gains) towards the end of the quarter as economic growth concerns began to rise.

In the US, the Federal Reserve implemented a series of interest rate hikes, raising the US policy rate by 0.50% in May and a further 0.75% in June, their most significant single rate hike since 1994. At the same time, Federal officials cut their 2022 growth forecasts. In response, the US 10-year bond yield rose from 2.35% to 3.02% over the quarter.

European bond yields were volatile as the European central bank indicated it would end asset purchases early in the third quarter and raise interest rates soon after. With this backdrop, the German 10-year bond yield increased from 0.55% to 1.37% over the quarter.

In the UK, the Bank of England implemented further interest rate hikes, bringing the total to five in the current cycle and raising its inflation forecast to a staggering 11%. This helped push the UK 10-year bond yield from 1.61% to 2.24%.

Corporate bonds also suffered in the broad bond market sell-off and generally underperformed government bonds as credit spreads widened markedly. With mounting concerns over the economic outlook, high yield credit securities (with lower credit quality) were hit particularly hard.

The FTSE World Government Bond Index 1-5 Years (hedged to NZD) returned -1.0% for the quarter, while the broader Bloomberg Global Aggregate Bond Index (hedged to NZD) returned.

Source: FTSE World Government Bond Index 1-5 Years (hedged to NZD)

New Zealand fixed interest


The Reserve Bank of New Zealand (RBNZ) increased the Official Cash Rate (OCR) by 0.50% on 14 April and by 0.50% on 26 May, taking this benchmark rate from 1.00% to 2.00% by the end of the quarter.

In its accompanying statement, the RBNZ noted that “the level of global economic activity is generating rising inflation pressures that are being exacerbated by ongoing supply disruptions driven by both Covid-19 persistence and the Russian invasion of Ukraine. The latter continues to cause very high prices for food and energy commodities.”

The Monetary Policy Committee also reconfirmed it planned to continue to lift the OCR “at pace” to a level that will confidently bring consumer price inflation to within its one to three percent target range.

In effect, this confirms the expectations of the RBNZ are for interest rates to continue to rise, for the time being at least.

Given this outlook, the New Zealand 10-year government bond yield climbed from 3.25% at the end of the first quarter to 3.87% at the end of June. The New Zealand 2-year government bond yield followed an entirely similar pattern, beginning at 2.92% and ending the June quarter at 3.51%, an increase of 0.59%.

Similar to the effects seen overseas, these rising bond yields generally resulted in negative short-term returns for bonds of all durations.

The S&P/NZX A-Grade Corporate Bond Index fell by 1.4% for the quarter, while the longer duration but higher quality S&P/NZX NZ Government Bond Index fell by 3.2%.

Source: S&P/NZX A Grade Corporate Bond Index

Table 1. Asset class returns to 30 June 2022

Unless otherwise specified, all returns are expressed in NZD. We assume Australian, and emerging market shares are invested on an unhedged basis, and therefore reported returns from these asset classes are susceptible to movement in the value of the NZD. Index returns are before all costs and tax. Returns are annualised for periods greater than one year.

26 July 2022

Article provided by Consilium.

Disclaimer: Information as at 22 July 2022. This article is general information and does not consider your financial situation or goals and does not constitute personalised advice. Please contact your financial adviser for advice specific to your situation. There are no warranties, expressed or implied, regarding the accuracy or completeness of any information included as part of this article.

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