Q1: 31 March 2023
Global share markets delivered further positive results in the first quarter, buoyed by a reduction in recession concerns across leading developed markets. That these gains came despite a sharp, but short-lived, elevation in fears across the global banking sector in early March, highlighted a degree of market resilience that was absent in 2022.
Bond markets also contributed positively to portfolio returns in the quarter as expectations began to grow that the interest rate tightening cycle, particularly in the leading US market, might soon be coming to an end.
That said, there are still risks to the forward view. In particular, many central banks are continuing to raise interest rates in pursuit of a soft economic landing – where they manage to slow the economy and inflation recedes, without an excessive impact on businesses or workers. It is a very difficult undertaking to get just right, and the extent of their success will have a bearing on performance in the near term.
However, in the longer term, the prospects of a global economic recovery are slowly improving. And after several years of border closures, supply chain problems, labour shortages, and a myriad of other economic frustrations, that is an enticing thought.
+7.5% (hedged to NZD)
US and Eurozone share markets made further strong gains in the first quarter, despite increased volatility in the banking sector.
In early March, the collapse of Silicon Valley Bank in the US, followed by the swift buyout of Credit Suisse by UBS, initially sparked concerns about the potential for another global banking crisis. These concerns were quickly alleviated after the Federal Reserve expressed confidence in the resilience of the US banking system, and the Swiss authorities were equally alert in assisting with the takeover of Credit Suisse.
By the quarter’s end, the early March wobbles were a fading memory, and the share markets ended the month positively on the back of improving investor sentiment.
The UK share market was also higher, aided by the news that the UK’s latest quarterly GDP data was better than expected and that the UK economy had avoided a technical recession in the fourth quarter of 2022.
Against major currencies, the New Zealand dollar was a little weaker through the quarter, which meant increased reported returns for investors holding unhedged foreign assets.
The MSCI World ex-Australia Index delivered a healthy return of +7.5% for the quarter hedged to the NZ dollar and +9.5% for the unhedged index.
Source: MSCI World ex-Australia Index (net div.)
Emerging markets shares
The emerging markets posted solid positive returns over the first quarter although lagging the general returns from developed markets.
The start of the year brought renewed optimism for the emerging markets, given the
reopening of the Chinese economy. However, February and March saw a re-escalation in US-China tensions, highlighted by the shooting down of a Chinese high-altitude balloon in US airspace. Despite this, the Chinese share market still delivered a return similar to the emerging markets index during the quarter.
A number of individual emerging countries, headed by the Czech Republic, produced strong double-digit returns for the quarter. The Mexican market performed well against a backdrop of improving economic data, while more significant players Taiwan and Korea, seen as beneficiaries of the improving optimism about global growth, were amongst the other strong contributors.
The Brazilian market was down against a backdrop of softening economic data and anti-government riots that damaged government buildings in January. India also generated negative returns amid allegations of fraud and share price manipulation at a major Indian conglomerate early in the quarter.
In aggregate, it was a good performance by the emerging markets group in their local currencies, and the slightly weaker New Zealand dollar over the quarter meant the MSCI Emerging Markets Index produced a quarterly return of +5.6% in unhedged New Zealand dollar terms.
Source: MSCI Emerging Markets Index (gross div.)
New Zealand shares
As measured by the S&P/NZX 50 Index, the New Zealand market backed up its solid +3.8% return in the last quarter of 2022 with another +3.9% return in the first quarter of 2023.
Five of the top 15 companies, by market capitalisation, made strong contributions to the index performance this quarter – Fisher & Paykel Healthcare (+17.9%), Mercury NZ Ltd (+15.1%), and Auckland International Airport (+11.4%).
While these in particular were excellent results, the New Zealand market overall lagged behind most developed market counterparts. This was likely a reflection of the ongoing economic uncertainty locally, which was underscored by the announcement in March that New Zealand’s GDP fell by 0.6% in the fourth quarter of 2022.
While winners outnumbered losers within New Zealand’s top 50, a couple of notable returns on the downside included a2 Milk which gave up much of last quarter’s gains by posting
-15.5% and Heartland Group Holdings fell -10.3% in what was a weak quarter for most banking companies globally.
Source: S&P/NZX 50 Index (gross with imputation credits)
The Australian share market (ASX 200 Total Return Index) began the year in similar fashion to New Zealand by delivering a +3.1% result for the first quarter.
Within the top 100 companies which drive the bulk of the index returns, materials sector firms (Liontown Resources +95.5% and Newcrest Mining +32.6%) delivered outstanding gains.
Liontown, a battery metals exploration firm, saw its shares jump by over 50% in a day after the company rejected a series of takeover proposals from Albemarle Corporation, the largest provider of lithium for electric vehicle batteries in the world.
In what was generally a productive quarter for technology firms globally, Wisetech Global (+28.5%) and Xero Ltd (+27.3%) also delivered significant gains.
At the other end of the spectrum, shares in coal mining company Whitehaven Coal fell -25.2% following significant weakness in the coal price during the first quarter, while financial services firm Computershare Ltd declined -16.5%.
Although the index return in Australian dollar terms was slightly higher at +3.5%, the reported returns to unhedged New Zealand investors declined a little due to a slight strengthening in the value of the New Zealand dollar (versus the Australian dollar) over the quarter.
Source: S&P/ASX 200 Index (total return)
International fixed interest
During the first quarter, the positive sentiment on the growth outlook improved, and some of the headline inflation pressures showed signs of abating, particularly as energy prices weakened. However, core consumer price inflation measures (excluding food and energy) delivered upside surprises in both the US and Europe. While there were signs that interest rate hiking cycles were already biting in many regions (particularly within housing markets), the downstream impacts on broader economic performance remain to be revealed.
Central banks continued with their rate rising programmes, although some adjusted their stance. The US Federal Reserve announced two rate hikes in the quarter of 0.25% each, marking a slowdown from their last six adjustments of either 0.50% or 0.75% each. The Bank of England also approved two hikes of 0.50% and 0.25%, respectively, while the European Central Bank remained more aggressive by comparison and raised rates twice in 0.50% increments. The Bank of Canada enacted a rate hike of 0.25% but signalled a pause immediately upon doing so, while the Bank of Japan made no further adjustments to its yield curve control policy, despite core inflation rising.
Against this backdrop, bond markets with widening credit spreads were relatively volatile, meaning US and European investment grade bonds generally underperformed government bonds.
Over the quarter, the US 10 year bond yield declined from 3.88% to 3.47%, with the two year bond yield similarly retreating from 4.43% to 4.04%. Germany’s 10 year bond yield fell from 2.56% to 2.30%, while the UK 10 year yield decreased from 3.67% to 3.49%.
The US dollar was weaker against most of its G10 peers over the quarter, driven by changes in rate hike expectations.
The FTSE World Government Bond Index 1-5 Years (hedged to NZD) returned +1.6% for the quarter, while the broader Bloomberg Global Aggregate Bond Index (hedged to NZD) advanced +2.7%.
Source: FTSE World Government Bond Index 1-5 Years (hedged to NZD)
New Zealand fixed interest
In keeping with the trend overseas, the Reserve Bank of New Zealand (RBNZ) raised the Official Cash Rate (OCR) by a further 0.50% in February, following the larger 0.75% rise in November.
In their 22 February statement, the RBNZ noted that the outlook for global activity in 2023 remains subdued, which is acting to lower global consumer pricing pressures and demand for New Zealand’s key commodity exports. However, core inflation remains high internationally, and inflationary pressures remain broad-based.
The statement did not contain any suggestion that the previously outlined monetary policy track would be subject to any adjustment.
Over the quarter to 31 March, the New Zealand 10 year bond yield declined from 4.55% to 4.23%.
The S&P/NZX A-Grade Corporate Bond Index rose +2.4% for the quarter, while the longer duration but higher quality S&P/NZX NZ Government Bond Index gained +2.5%.
Source: S&P/NZX A-Grade Corporate Bond Index
26 April 2023
Article provided by Consilium.