Dear Clients
I’m sure many of you are watching the recent market volatility with interest. The below note provides a brief update on recent events.
It is worth highlighting that these market falls come in the context of significant gains, particularly for the US share market. Although bouts of volatility across listed markets can be unsettling for investors, periods such as this are normal for share markets and often follow periods of strong gains or stability.
As always, we remind Trustees to remain focussed on ensuring investment portfolios are well diversified across a range of asset types, with an asset allocation aligned to the investment timeframe and tolerance for risk, and to avoid the temptation for material changes to settings in response to events that can be short term or transitory in nature.
If you would like to discuss market events or your portfolio settings, I welcome you to reach out to us here at Trust Management at any time.
What has happened in markets:
The last week has seen a resurgence in volatility across share markets with a significant shift in investor sentiment.
Japanese stocks led the market declines with the Japanese Nikkei 225 index declining over 20% in the space of only three days. As at Aug 7th, one day after the plunge, Nikkei 225 Index gained just over 10% overnight, and Yen weakened by more than 2% against the US dollar.
US and European markets also suffered major declines with technology stocks the worst performers given their recent strong gains. As of Aug 5th, the US S&P500 was down 6.0% over the first three trading days of the month, with the technology focussed Nasdaq index down 8.0%. Both indexes bounced back strong overnight reflecting the markets correction of the panic selloff over the U.S economic data release.
The New Zealand and Australian markets fared much better during the global selloff with our local market relatively flat, albeit our index failed to report the same run up in share prices leading into the most recent declines.
The losses across share markets were in steep contrast to bond markets with fixed interest securities performing well as bond yields fell given the significant shift in interest rate expectations. The yield on the benchmark 10 yr New Zealand government bond has fallen 35bps to 4.3% since mid-July, with the asset class returning just under +3% for the period from the start of July to 6 August.
The gains in bond markets, a traditionally defensive asset, is a good reminder of the benefits of diversification. Our recommended settings for clients typically include a diversified portfolio or “pro-cyclical” and “anti-cyclical” assets across private and public markets, which may comprise actively managed and index orientated management strategies with a focus on sustainable income over the long term. This approach helps in smoothing portfolio returns during uncertain periods.
Why it happened:
The market volatility was initially triggered by disappointing U.S. economic and employment data alongside a divergence in central bank policies.
Investors are now expecting the U.S. Federal Reserve to make four rate cuts before year-end, with significant reductions potentially taking place in the September and November meetings.
Contrastingly, the Bank of Japan (BOJ) surprised investors last week by raising its policy rates from 0% to 0.25%. This unexpected move resulted in a substantial surge in the Yen's value, causing a significant selloff in Japanese shares. In the wake of market volatility, BOJ signalled to the market that there will be no further hikes until markets had stabilised. The statement offered comfort and much needed reassurance to markets, leading stocks to rebound.
These movements in the equity markets were further intensified by U.S. corporate earnings reports, with the technology sector's performance meeting expectations but without the associated upgrades to future earnings forecasts – an aspect that has previously supported sentiment towards technology related stocks.
Outlook:
Despite the selloff, global share markets are bouncing back strongly and remain well in positive territory year to date, reflecting that corporate earnings are still performing well.
Analysts meanwhile consider markets could be overreacting to data flow from the U.S. with the probability of recession in the coming 12 months largely unchanged according to Bloomberg estimates, at 30% (which is largely unchanged).
While we acknowledge the market volatility can be uncomfortable and concerning for investors, history shows us that movements of this nature are not unusual for share markets.
As a dedicated long-term investor, our commitment lies in guiding our clients through the market's fluctuations. As always we are available to discuss this in more detail with you.
Ngā mihi
Matthew Goldsack
General Manager – Investments
027 5914 643
Trust Investments Management Limited is the manager and issuer of the Trust Management PIE Funds Scheme, which comprises six PIE funds, including an unlisted property fund. A copy of the Scheme’s Product Disclosure Statement is available from www.trustmanagement.co.nz/investorresources
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