For the three months ending March 2019
Following a challenging end to 2018, global financial markets staged a very strong recovery in the first quarter of this year. In fact, global share markets delivered their best quarterly gain in a decade, with the MSCI All Country World Index up 11.7%, in local currency terms. An easing in global trade tensions, and a strong improvement in financial conditions for companies on the back of news that global interest rates may stay ‘lower for longer’ all sent share markets higher.
Markets driven higher by a change in sentiment
A big focus for investors last year was trade friction between the US and China. So news that the two sides were moving closer to announcing a trade deal was well received by investors. At the same time US economic data showed signs of slowing but remained stronger than other developed markets like China, Europe and Japan. When the economic environment is supportive, that’s usually good for share prices.
Another catalyst for the falls in share markets late last year was higher interest rates in the US. However, recent evidence of a slowdown in the US economy and a lack of inflation has prompted the US Federal Reserve to revise its outlook for interest rates for the rest of this year. Investors therefore took comfort from a likelihood that US interest rates are now closer to a peak.
Bond and property markets also deliver strong gains
While we would have expected bond markets to be on the back foot given the strong performance of shares, they actually had a strong quarter, as global interest rates look like they may stay lower for longer – an ideal environment for bond investors. Meanwhile, listed property markets were the standout performers, benefiting from the steady cash flows available from this asset class.
New Zealand market
New Zealand shares recovered their fourth-quarter losses and went on to hit a new record high, with the NZX 50 Index up 11.7% over the quarter. In this low interest rate environment, New Zealand shares were in particularly high demand from overseas investors seeking yield – given the high yield nature of our local share market.
Some improvement from the economy
Despite weak business confidence, New Zealand's economic growth rebounded in the fourth quarter of last year, as households spent up on everything from eating out to holidaying.
According to Statistics New Zealand, GDP grew by 0.6% during the three months to December 2018, double the 0.3% pace of the third quarter. Year-on-year data was a disappointment however, showing that the pace of economic growth slowed to 2.8%.
Bonds gain as local interest rates appear to have peaked
New Zealand bonds took their lead from their international counterparts, but were given an extra boost as the Reserve Bank of New Zealand (RBNZ) shifted its stance on interest rates. While it left the Official Cash Rate (OCR) unchanged at 1.75%, it announced that it was moving to a ‘dovish’ bias – essentially signalling that the next move in interest rates is more likely to be lower.
Bonds tend to perform well in an environment of steady or declining interest rates. So against this backdrop the yield on the New Zealand 10-year government bond fell sharply over the quarter. This translated to strong gains from the local bond market.
Kiwi dollar also up
Despite the RBNZ’s change in policy stance, the New Zealand dollar gained against a basket of overseas currencies. The dollar rose 0.6% on a trade-weighted basis over the quarter.