Traditional investing is typically based on the foundation that different asset classes will characteristically perform differently over any given period. This is one of the main premises for constructing a well-diversified investment portfolio. At its simplest, this assumes a decline in shares will be countered by a gain in bonds (and vice versa), which will help to limit the volatility experienced in portfolios. For investors with a balanced portfolio, this typically means a smoother ride, with one of their asset classes performing well in any given time, regardless of wider market and economic conditions.

However, this has not been the case for investors year-to-date in 2022, as highlighted by the chart above.  There have been falls in both bond markets and domestic and international equities, along with most other asset classes, including New Zealand property. Whilst recent volatility is disconcerting, it is important to keep in mind that market volatility is simply a part of investing.

Uncertainty remains

Many of the factors that have weighed on markets since the start of the year are continuing to play out. These include, and are not limited to, geopolitical conflicts – most notably the war in Ukraine, the ongoing global supply/demand imbalance following the COVID-19 pandemic, and the resulting high energy and commodity prices, which has helped to fuel record high levels of inflation. This has meant central banks are tightening monetary policy now by rising interest rates to slow economies and control inflation.

In New Zealand, consumer confidence looks weaker as budgets are further eroded by inflation, and the outlook for the second half of this year is becoming more difficult with ongoing headwinds. In an uncertain environment, prudent portfolio diversification remains our key defence, including increasing exposure to more defensive sectors and to inflation hedges in current conditions.

New Zealand Cash and Fixed Interest

Over the past 12-18 months, rising interest rates have negatively impacted fixed income valuations as bond prices and interest rates are negatively correlated (i.e. where values move in opposite directions). Earlier this month, the five-year swap interest rate in the wholesale market increased to the highest since July 2014. For NZ bonds, this has continued to hit capital values, with NZ Investment Grade Corporate bonds returning -4.3% for the year (including income).

However, one positive for investors now is that the sharp rise in yields has meant that the future prospects for bonds look better than they have recently, particularly if expectations for interest rate rises have peaked. As is the case in New Zealand, US interest rates have moved substantially in 2022. In June, the US two-year Treasury yield broke 3.05%, having increased to the highest levels since late 2007.

Equity Markets 

New Zealand equities have poorly performed year-to-date, with the NZX 50 down -16.6%, with losses spread widely across the market. Among the largest caps, only Spark (up +10.2%) is positive for the year, while there have been sizable revaluations for Fisher & Paykel Healthcare (-38.1%), Summerset (-29.3%), Mainfreight (-25.6%), Ryman Healthcare (-26.3%) and Fletcher Building (-28.5%).

Australian shares are also down year to date (-9.3%), but have been relatively resilient compared to most overseas markets, partly due to the broader base of the Australian economy. Performance has been helped by the Materials (+11.9%) and Energy Sectors. The big losses have been in Technology, Real Estate and Consumer Discretionary Sectors.

International Equities

A temporary equity market recovery in March after the initial Ukraine selloff, was followed by a renewed selloff through April, which has been sustained into June. Year-to-date the MSCI All Countries World Index is now down by -20.2% in local currency.

The weakness has been widespread. In the U.S., the S&P 500 is down by -20.6% while the tech-heavy Nasdaq is down by -29.5%; The UK has outperformed, falling just 2.9% for the year-to-date, lifted by its exposure to major global energy companies, while the broader MSCI Europe (ex UK) is down -19.0%. Japan’s Nikkei had a slight recovery, now down by -8.3%. Returns in New Zealand dollar terms are slightly better due to a falling NZD and a strengthening USD. 

We’re here to help

For investors, large market movements can be unnerving. Despite the range of issues, strategically building a portfolio around financial goals can help retain a long-term perspective amid the short-term challenges. Recent market swings may cause investors to be on edge but may also provide opportunities for those who remain focused on their long-term goals.

Our goal at Trustees Executors is to protect our clients’ financial security and to help you realise your financial goals. That includes helping you get through difficult economic times and making sure that your investments are positioned for an economic recovery.

If you are feeling anxious about market volatility, talking with a financial adviser can offer you some perspective and support. As always, it is important to check in and ensure that your current investment strategy is right for you and serves your objectives.

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