Monthly Review. For the month of July 2018

Transcription

1 Monthly Review For the month of July 2018

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3 Markets new zealand Leading economic indicators currently imply that New Zealand s economic growth rate will slow in the coming months. Economic data released in July tended to reinforce this view. Inflation was slightly lower than expected, increasing by just 0.4% over the June quarter compared to market expectations of a 0.5% increase. In the year to June 2018, inflation as measured by the CPI rose by 1.5%. Residential house sales also declined over the month, falling 1.6%. While this is partly seasonal, the volume of sales growth has declined to just 1.5% over the past 12 months. House sales tend to lead house prices. Against this backdrop, business confidence continues to decline. The ANZ Own Activity Index fell to its lowest level since This indicator has been a good measure of GDP growth and would imply around a 0% growth rate for the September 2018 quarter. This data confirms that the Reserve Bank of New Zealand ( RBNZ ) will unlikely increase interest rates any time in the near future. As the RBNZ noted in their last update, the next move could be either up or down. The New Zealand share market increased by just 0.09% 1 over the month with EBOS Group the top performer. A2 Milk and Tourism Holdings were the laggards over the month. The New Zealand dollar (NZ$) was relatively flat over the month trading between US$0.670 and US$ australia The outlook for the Australian economy remains mixed. Business and consumer confidence remains positive and the economy continues to report strong employment growth. The unemployment rate is just 5.4%, however house prices did decline slightly over the month with the CoreLogic index falling by 0.3%. It is difficult to know what impact this will have on consumer spending. In the past there has been a wealth effect of higher house prices feeding through into higher consumer spending. Economic models would suggest consumers spend around 6% of any house price increase. This can also have an impact when house prices decline, although the impact is believed to be less. If house prices continue to fall and this feeds through to lower consumer spending and confidence, then economic growth is also expected to fall. This relationship is likely to remain the market s key focus over the next quarter. The Australian share market appreciated by 1.39% 2 over the month. The telecommunications sector was the top performing sector recovering some of the losses this sector experienced earlier this year. The NZ$ AU$ cross traded between AU$0.925 and AU$0.910 over the month. international The trade war between the United States and China officially started in July with the United States implementing their tariffs on Chinese goods. As expected, the Chinese retaliated. Interestingly, financial markets largely ignored this. We think this reflects a view that these tariffs are just pre-positioning moves prior to negotiations. The announcement that the United States and Europe had reached a trade agreement reinforced this view. Instead, financial markets tended to focus on the United States reporting season. This was generally positive with S&P 500 earnings per share increasing on average by 23.3% 3. However, there were notable earnings misses. Shares in Facebook declined by 20% after announcing lower than expected growth forecasts. Highlighting the strength of the United States economy, second quarter growth is estimated to have grown by 4.0% 4 annualised over the quarter. The S&P 500 rose by 3.60% over the month. Emerging markets rebounded during the month with the US dollar-based index increasing by 1.9% 5. Some of the rebound was due to the Chinese Government announcing a loosening in credit controls. Historically, China has been very successful in encouraging growth by increasing the flow of credit. Other developed share markets were also generally positive in July. The Euro Stoxx 50 increased by 3.83%, the Japanese Nikkei by 1.12% and the United Kingdom FTSE 100 by 1.52%. 1. NZX S&P 50 Portfolio Gross Index with imputation credits 2. ASX S&P 200 Accumulation Index 3. UBS 4. Bloomberg 5. MSCi Emerging markets index in United States dollars.

4 Managed Portfolio Service income category¹ The Income Category returned 0.52% for the month of July, taking the 12-month return to 1.22%. The Income Category recently added new positions in the New Zealand electricity lines sector. These include the bonds issued by Vector (the lines company for the Auckland area), WEL Networks (the lines company for the Waikato region) and PowerCo (the lines company for the Taranaki, Coromandel and Tauranga regions). These companies own and maintain the electric cables that link your house, farm or business to the high voltage main trunk operated by Transpower. While the infrastructure that these companies provide is critically important to everyday life, it is also a stable if not boring industry. However, as a bond holder this is not such as bad thing as it means the businesses are reliable and offer few surprises. A key factor that accentuates this reliability is the structure of the industry. The companies operate as regional monopolies and are regulated to varying degrees by the Commerce Commission. This tends to smooth the cashflows earned by these companies and, importantly, also provides a framework to manage the large capital expenditures required in the sector. A recent example of this is PowerCo, which has received permission from the Commerce Commission to raise its prices to offset an additional $1.2 billion of capital spending required over the next five years. In total these positions comprise approximately 7% of your Category and they offer a yield of 4.30% on average. inflation category 2 The Inflation Category returned 1.02% for the month of July, taking the 12-month return to 7.86%. As global markets try to shake off the reality of a trade war with China, a strong jobs report out of the United States at the end of June saw shares enjoy positive gains in July. Furthermore, there looks to be a market rotation taking hold as financial shares outperform following a strong earnings season at the start of the month. Financials have performed well following the Federal Reserve's (the Fed ) stress tests in late June. The Fed determined that 31 of the 35 lenders tested maintained strong balance sheets and had proper plans in place in the event of a global recession. Furthermore, most banks that reported second quarter 2018 results this week managed to record bottom-line improvement on the back of rising rates, lower provisions and improved trading activities. A core strength of the Inflation Category is our ability to identify and access sectors of the economy that are particularly inflation resistant. A good example of this is the Category s overweight position in the banking sector. This positive price movement for most bank shares over the month helped drive the Category higher. growth category 3 The Growth Category returned 0.80% for the month of July, taking the 12-month return to 10.84%. The New Zealand share market was roughly flat in July, masking a wide range of performance on stock specific factors. For example, pharmaceutical distributor Ebos Group was the top performer following a large contract win. In Australia, the market appreciated 1.39%, despite weakness in the resource sector. The Dividend & Growth Portfolio returned -0.68%. The main driver of the weak month was our holding in crop-protection company Nufarm, whose share price fell 19% after the company downgraded earnings guidance due to an unusually severe drought in Australia. Historically, these climate driven sell-offs have offered good buying opportunities, and we subsequently bought more shares in the company. Nufarm stands to benefit from a long-term global trend towards more intensive agriculture at the same time as the global agro-chemical sector is consolidating, and the management team modernise and diversify Nufarm s operations. The globally-focused growth portfolios rose over the month reflecting the rise in global share markets. Core Growth Portfolio and Global Equity Portfolio have a portion of their exposure through equity futures. These futures enable the portfolios to get a market return on this portion. This was the largest contribution to return over the month. Amongst the global managers, Suvretta slightly underperformed the S&P over the month. However, over the past twelve months they have been able to achieve a similar return to the S&P but by taking only 60% of the risk. ISAM also had a positive month and continued to recapture the losses experienced at the start of the year. Similarly, H2O which experienced a poor June, rebounded over July and recovered half the loss. These latter two managers provide important diversification to the Core Growth Portfolio. The Global Multi Asset Growth Portfolio lagged the other portfolios over the month reflecting its exposure to companies producing commodities. The commodity index ended the month down and is negative this year, but the Portfolio remains in positive territory. This highlights the benefits of investing in the companies that produce the commodities rather than the commodities themselves. 1. The return calculations are based on a 50% allocation to the Core Income Portfolio and a 50% allocation to the Global Income Portfolio. 2. The return calculations are based on a 34% allocation to the Core Inflation Portfolio, a 33% allocation to the Property Inflation Portfolio, and a 33% allocation to the Equity Inflation Portfolio. 3. The return calculations are based on a 25% allocation to the Core Growth Portfolio, a 10% allocation to the Global Multi-Asset Growth Portfolio, a 25% allocation to the Global Equity Growth Portfolio, and a 40% allocation to the Dividend and Growth Portfolio.

5 KiwiSaver Scheme income strategy The Income Strategy returned 0.53% for the month of July, taking the 12-month return to 1.56%. The Income Strategy recently added new positions in the New Zealand electricity lines sector. These include the bonds issued by Vector (the lines company for the Auckland area), WEL Networks (the lines company for the Waikato region) and PowerCo (the lines company for the Taranaki, Coromandel and Tauranga regions). These companies own and maintain the electric cables that link your house, farm or business to the high voltage main trunk operated by Transpower. While the infrastructure that these companies provide is critically important to everyday life, it is also a stable if not boring industry. However, as a bond holder this is not such as bad thing as it means the businesses are reliable and offer few surprises. A key factor that accentuates this reliability is the structure of the industry. The companies operate as regional monopolies and are regulated to varying degrees by the Commerce Commission. This tends to smooth the cashflows earned by these companies and, importantly, also provides a framework to manage the large capital expenditures required in the sector. A recent example of this is PowerCo, which has received permission from the Commerce Commission to raise its prices to offset an additional $1.2 billion of capital spending required over the next five years. In total these positions comprise approximately 7% of your Category and they offer a yield of 4.30% on average. inflation strategy The Inflation Strategy returned 0.96% for the month of July, taking the 12-month return to 10.41%. As global markets try to shake off the reality of a trade war with China, a strong jobs report out of the United States at the end of June saw shares enjoy positive gains in July. Furthermore, there looks to be a market rotation taking hold as financial shares outperform following a strong earnings season at the start of the month. Financials have performed well following the Federal Reserve's (the Fed ) stress tests in late June. The Fed determined that 31 of the 35 lenders tested maintained strong balance sheets and had proper plans in place in the event of a global recession. Furthermore, most banks that reported second quarter 2018 results this week managed to record bottom-line improvement on the back of rising rates, lower provisions and improved trading activities. A core strength of the Inflation Strategy is our ability to identify and access sectors of the economy that are particularly inflation resistant. A good example of this is the Strategy s overweight position in the banking sector. This positive price movement for most bank shares over the month helped drive the Strategy higher. growth strategy The Growth Strategy returned 1.18% for the month of July, taking the 12 month return to 14.98%. The New Zealand share market was roughly flat in July, masking a wide range of performance on stock specific factors. For example, pharmaceutical distributor Ebos Group was the top performer following a large contract win. In Australia, the market appreciated 1.39%, despite weakness in the resource sector. The Australasian share component of the Strategy returned -0.66%. The main driver of the weak month was our holding in crop-protection company Nufarm, whose share price fell 19% after the company downgraded earnings guidance due to an unusually severe drought in Australia. Historically, these climate driven sell-offs have offered good buying opportunities, and we subsequently bought more shares in the company. Nufarm stands to benefit from a longterm global trend towards more intensive agriculture at the same time as the global agro-chemical sector is consolidating, and the management team modernise and diversify Nufarm s operations. The globally-focused Growth Strategy rose over the month reflecting the rise in global share markets. The Strategy has a portion of its exposure through equity futures. These futures enable the Strategy to gain a market return and were the largest contribution to returns over the month. Amongst the Strategy s specialist active managers, Suvretta slightly underperformed the S&P 500 Index over the month. However, over the past 12 months they have been able to achieve a similar return to the S&P 500 Index but by taking only 60% of the risk. ISAM also had a positive month and continued to recapture the losses experienced at the start of the year. Similarly, H2O, which experienced a poor June, rebounded over July and recovered half the loss. These latter two managers provide important diversification to the Strategy. Impala was slightly negative over the month reflecting its exposure to companies producing commodities. The commodity index ended the month down and is negative this year, but Impala remains in positive territory. This highlights the benefits of investing in the companies that produce the commodities rather than the commodities themselves.

6 Managed Superannuation Service income strategy The Income Strategy returned 0.53% for the month of July, taking the 12-month return to 1.50%. The Income Strategy recently added new positions in the New Zealand electricity lines sector. These include the bonds issued by Vector (the lines company for the Auckland area), WEL Networks (the lines company for the Waikato region) and PowerCo (the lines company for the Taranaki, Coromandel and Tauranga regions). These companies own and maintain the electric cables that link your house, farm or business to the high voltage main trunk operated by Transpower. While the infrastructure that these companies provide is critically important to everyday life, it is also a stable if not boring industry. However, as a bond holder this is not such as bad thing as it means the businesses are reliable and offer few surprises. A key factor that accentuates this reliability is the structure of the industry. The companies operate as regional monopolies and are regulated to varying degrees by the Commerce Commission. This tends to smooth the cashflows earned by these companies and, importantly, it also provides a framework to manage the large capital expenditures required in the sector. A recent example of this is PowerCo which has received permission from the Commerce Commission to raise its prices to offset an additional $1.2 billion of capital spending required over the next five years. In total these positions comprise approximately 7% of your Strategy and they offer a yield of 4.30% on average. inflation strategy The Inflation Strategy returned 0.95% for the month of July, taking the 12-month return to 10.35%. As global markets try to shake off the reality of a trade war with China, a strong jobs report out of the United States at the end of June saw shares enjoy positive gains in July. Furthermore, there looks to be a market rotation taking hold as financial shares outperform following a strong earnings season at the start of the month. Financials have performed well following the Federal Reserve's (the Fed ) stress tests in late June. The Fed determined that 31 of the 35 lenders tested maintained strong balance sheets and had proper plans in place in the event of a global recession. Furthermore, most banks that reported second quarter 2018 results this week managed to record bottom-line improvement on the back of rising rates, lower provisions and improved trading activities. A core strength of the Inflation Strategy at NZ Funds is our ability to identify and access sectors of the economy that are particularly inflation resistant. A good example of this is the Strategy s overweight position in the banking sector. This positive price movement for most bank shares over the month helped drive the Strategy higher. growth strategy The Growth Strategy returned 1.18% for the month of July, taking the 12 month return to 14.73%. The New Zealand share market was roughly flat in July, masking a wide range of performance on stock specific factors. For example, pharmaceutical distributor Ebos Group was the top performer following a large contract win. In Australia, the market appreciated 1.39%, despite weakness in the resource sector. The Australasian share component of the Strategy returned -0.66%. The main driver of the weak month was our holding in crop-protection company Nufarm, whose share price fell 19% after the company downgraded earnings guidance due to an unusually severe drought in Australia. Historically, these climate driven sell-offs have offered good buying opportunities, and we subsequently bought more shares in the company. Nufarm stands to benefit from a longterm global trend towards more intensive agriculture at the same time as the global agro-chemical sector is consolidating, and the management team modernise and diversify Nufarm s operations. The globally-focused Growth Strategy rose over the month reflecting the rise in global share markets. The Strategy has a portion of its exposure through equity futures. These futures enable the Strategy to gain a market return and were the largest contribution to returns over the month. Amongst the Strategy s specialist active managers, Suvretta slightly underperformed the S&P 500 Index over the month. However, over the past 12 months they have been able to achieve a similar return to the S&P 500 Index but by taking only 60% of the risk. ISAM also had a positive month and continued to recapture the losses experienced at the start of the year. Similarly, H2O, which experienced a poor June, rebounded over July and recovered half the loss. These latter two managers provide important diversification to the Strategy. Impala was slightly negative over the month reflecting its exposure to companies producing commodities. The commodity index ended the month down and is negative this year, but Impala remains in positive territory. This highlights the benefits of investing in the companies that produce the commodities rather than the commodities themselves.

7 New Zealand Funds Management Limited is the issuer of the NZ Funds Managed Portfolio Service and the NZ Funds KiwiSaver Scheme. The Product Disclosure Statement and the Disclose Register contain important information to help you to understand how your money is managed and the risks associated with investing. A copy of the NZ Funds Managed Portfolio Service Product Disclosure Statement and the NZ Funds KiwiSaver Scheme Product Disclosure Statement is available on request or by visiting the NZ Funds website at Even if you have invested with NZ Funds for many years, please take the time to read these documents regularly as the content is frequently updated. Disclaimer Past performance is not necessarily an indication of future returns. This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter. While the information provided in this document is, to the best of our knowledge and belief, stated accurately, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed in this document except as required by law.

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