Drivers of investment performance
- After being in positive territory for most of November, global sharemarkets fell into month’s end on the emergence of a new Covid-19 virus variant, labelled Omicron by the World Health Organisation, and on growing expectations the US Federal Reserve (the Fed) will move more quickly than previously anticipated in tightening their policy positions.
- Over the last week of November, global sharemarkets fell -2.9%, resulting in a total decline of 1.5% for the month.
- It will take some weeks to learn about Omicron, eg how fast it will spread, whether it is able to evade existing vaccines and the severity of its health impact. It has already had an impact, delaying reopening in some countries and resulting in travel bans. Omicron comes at a time the Northern Hemisphere is entering winter and highlights that the fight against the pandemic is far from over. At the same time, new variants of the virus are not totally unexpected. As US President Biden observed, it provides “cause for concern, not panic”.
- For most of November better than expected economic data, a continuation of high reported inflation numbers and rising virus cases across Europe were the focus of financial markets.
- US economic data has surprised on the upside. The survey of US manufacturing activity was stronger than expected, as was the services sector survey which rose abruptly to a historical high. An estimated 531k new jobs were created in October, 81k more than expected. Meanwhile, initial jobless claims fell to their lowest level since 1969. There are 10.4 million job openings in America compared to 7.4 million people unemployed. US retail sales and industrial production were also stronger than forecast in October.
- Manufacturing and service sector surveys across Europe remain elevated, highlighting the global economy is well placed to keep expanding over 2022. In China, after a period of weakness, there has been a firmer tone to their manufacturing survey data, likely reflecting an easing of electricity shortages and raw material prices.
- The manufacturing surveys in the US and Europe highlight supply chain pressures, labour and material shortages, and increasing prices.
- Reported inflation remains elevated around the world. It is estimated that global annual inflation is running at 3.7%; this compares to year-on-year inflation of 1.5% in late 2020.
- US core inflation has risen 4.6% over the last year, the highest annual increase in over 30 years. Likewise, the Fed’s preferred measure of inflation, the Personal Consumption Expenditure Index, is at a 30 year high having risen 4.1% over the year. It appears US inflation has become broad based; the measure of median inflation has risen to 3.1%, up from 2.0% earlier in the year.
- European inflation rose by more than expected in November. Based on initial estimates, core European inflation is up 2.63% over the last year compared to expectations of 2.3%. This is the highest level of core inflation since 2002.
- As expected, and reflecting the US economic backdrop, the Fed announced they would begin reducing the pace at which they purchase securities (tapering). At the beginning of the month the plan was to reduce the pace of security buying by $15 billion a month, targeting a June 2022 end to their quantitative easing (QE) programme (security purchases).
- By month’s end several Fed officials had expressed a faster pace of tapering was likely warranted than initially indicated. Quickening the pace of tapering will provide the Fed with greater flexibility as to when to increase interest rates. The market is bringing forward the possible timing of interest rate increases by the Fed – a middle of next year lift-off is now looking increasingly likely.
- The Reserve Bank of New Zealand (RBNZ) increased the Official Cast Rate (OCR) in November. The OCR is currently 0.75%, following 0.25% increases in each of the last two months. The RBNZ’s Monetary Policy Statement emphasised New Zealand’s economic backdrop of high inflation pressures and a tight labour market. New Zealand’s unemployment rate fell to a 14 year low of 3.4% over the third quarter of this year. Accordingly, the RBNZ is anticipated to continue with a series of 0.25% hikes in the OCR over next year and into 2023.
- Global financial markets ended November on a negative note. Nearly all major asset classes, except for developed countries government bonds, experienced above average monthly losses in November, eg equities, oil, industrial metals and corporate debt securities prices declined.
- Global sharemarkets fell -1.5% in November, led lower by Europe, down -4.4% on rising virus cases. After reaching historical highs during November, the US sharemarket ended the month 0.8% lower. The European and US markets fell -5.2% and -2.6% over the last week of November respectively.
- Emerging markets fell heavily, declining -3.3% and continuing a run of underperformance relative to developed markets. Although declines were broad based, markets in Latin America and Eastern Europe declined the most on economic uncertainty and rising virus cases. Of the major developing markets, India fell -3.8% and China managed to gain 0.5%.
- The New Zealand sharemarket continued to underperform the rest of the world, despite rising 0.2% over the last week of the month. The domestic sharemarket fell -2.9% for the month on disappointing corporate earnings results and domestic economic uncertainty.
- Commodity prices also fell in November, the oil price falling -16.1% on modest increases in supply and rising Covid cases across Europe. The Bloomberg Commodity Index fell 7.3% over the month.
- After a period of underperformance, global government fixed income markets outperformed as concerns over the economic impacts of the new virus variant weighed on global investors.
- New Zealand Government Bonds returned 1.0% in November, interest rates fell given the global virus backdrop and on the RBNZ providing a more measured outlook for interest rate increases relative to expectations. Nevertheless, it has been a tough year for NZ fixed income given the dramatic increase in interest rates on stronger than expected economic data, rising inflation, and in anticipation of the RBNZ raising interest rates. The New Zealand 5-year Government Bond has increased 0.94% and 2.15% over the last three and twelve months respectively. Global bonds returned 0.7% for the month.
- The New Zealand dollar declined over the month, primarily reflecting strength in the US dollar given better than expected US economic data, and growing expectations the US Federal Reserve will tighten policy positions quicker than previously indicated. The NZ dollar also weakened following the RBNZ’s Monetary Policy Statement (a softer tone as to the rate of increase in interest rates). Over the month, the NZ dollar fell 4.9% versus the US dollar, 3.0% versus the Europe and was down 3.5% on a Trade Weighted Index (TWI) basis. The local currency rose 0.4% versus the Australian dollar over the month.
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