Drivers of investment performance
- Global economic data began to weaken in August and overall disappointed relative to expectations. Although this was most evident in countries like Australia given the continuation of their lockdown measures, economic data in the US and China also disappointed. For example, US July retail sales decreased more than expected, down 1.1%. In China industrial production rose 6.4% year-on-year versus expectations of a 7.9% increase, and retail sales growth slowed to 8.5% year-on-year versus 10.9% predicted.
- The softening of global economic data can primarily be attributed to the rise in virus cases.
- During the month rising Covid-19 cases dominated headlines around the world, forcing many countries, including New Zealand, China and Israel, to implement new lockdown measures.
- Those areas of the world experiencing a surge in Covid-19 cases included the southern states of America, China, Japan, Israel, and Australia. Although it varied from country to country, cases plateaued across Europe and Asia following sharp increases in July. Virus cases declined in the South American countries over August.
The economic data is also highlighting the different state of various economies. The recently published IHS Markit Purchasing Managers Indices (PMI), for both the manufacturing and services sectors, highlighted:
- Economic activity in Australia and Japan has weakened, particularly within the services sector. Although manufacturing has weakened, the service sector is impacted more by lockdown measures, eg restaurants, bars and hotels.
- The Eurozone has been remarkably resilient, the services sector index barely changed. Although the manufacturing index weakened, it remains strong.
- In the US and UK, both the manufacturing and services sectors declined more than anticipated. Notably, both countries have high levels of Covid-19 cases, but mobility restrictions are not tight
- The relatively sharp decline in US and UK PMIs in the absence of lockdowns suggests that rising virus cases still results in the dampening of consumer activity because people are less mobile for fear of the virus.
- This is consistent with the recent deterioration in US consumer confidence.
- Accordingly, economic growth estimates for the September quarter are being lowered, particularly for the US and China. The Australian economy is expected to contract over the three-month period ending September 2021.
- Following a stronger than expected US employment report early in the month, market attention quickly focused on the upcoming US Federal Reserve (the Fed) Chairman’s speech planned for the annual Jackson Hole symposium.
- For the record, the US economy created 943k jobs in July, relative to expectations of 870k. There are over 10 million job openings in the US, more than the number of people unemployed.
- From an equity markets perspective, the Fed Chairman did not disappoint when he gave his speech, making it clear the Fed could begin tapering before the end of the year and that the Fed’s decision to taper its $120 billion a month security buying programme did not mean it was going to raise interest rates any time soon. The Chairman’s speech focused on inflation, and he spent some time explaining why the recent rise in inflation would likely prove to be temporary
- On the inflation front, the US Core PCE Inflation Index, the Fed’s preferred measure of inflation, rose 0.3% in July and is up 3.6% from a year ago, the highest annual rate since the 1990s.
- In contrast to the global trend, New Zealand continued to record better than expected economic data. The strength of the New Zealand economy was highlighted by the fall in the unemployment rate to 4.0% and rising wage inflation.
- The move to Level 4 lockdown appears to have only delayed interest rate increases by the Reserve Bank of New Zealand (RBNZ). The most recent Monetary Policy Statement (MPS) signals a series of interest rate hikes to bring the Official Cash Rate to at least a neutral level (estimated at about 2%) over the next 12-18 months.
- Global sharemarkets moved higher in August, returning 2.7%. The US finished the month near all-time highs and ended the day at historical highs on 12 different occasions during the month. For the month, the US sharemarket returned 2.9%, its seventh consecutive monthly rise. Global sharemarkets are 19.3% higher than at the start of the year.
- Although the Fed Chairman’s speech provided a boost for global equity markets going into the end of the month, strong corporate earnings and low interest rates have been the primary drivers of sharemarket performance this year.
- The New Zealand sharemarket outperformed in August, returning just under 5.0% for the month and is 1% higher than what it was at the end of 2020. Solid earnings results and individual companies benefiting from changes in global indices underpinned the domestic sharemarket in August.
- Emerging market equities slightly underperformed developed markets, returning 2.1% versus 2.7%.
- Despite going into lockdown, the New Zealand dollar (NZ dollar) rose 1.0% versus the US dollar this month, boosted by the stronger than expected economic data and expectations the RBNZ will commence interest rate increases later this year. The NZ dollar was stronger relative to other major currencies for the same reasons, eg Australian dollar +1.5%, British pound +2.1%, and Euro +1.5%.
- Conversely, local fixed income markets underperformed for the reasons boosting the NZ dollar. As a result, the NZ Government Bond Index fell 1.3% in August. Global bonds were also weaker reflecting interest rates around the world are drifting higher due to above trend economic growth and central banks beginning, or signalling, the tightening of policy positions through either tapering and/or raising interest rates.
- Global commodities performance was mixed – oil fell 4.0%, copper 6.6% and iron ore 9.5% - on a variety of reasons, including softening of global economic data, reduced demand from China, and rising geopolitical events, eg Afghanistan.
This article has been prepared to provide general information and does not constitute 'financial advice' for the purposes of the Financial Advisors Act 2008 (Act). An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.