By Craig Simpson
Preliminary return data based on the April and May numbers, suggests investors could be in for a pleasant surprise when the end of June KiwiSaver returns are released.
April and May data has been overwhelmingly positive. This will result in a majority of the funds showing positive returns for the quarter and last twelve months.
One of the big drivers behind the improved returns has been the recovering of commodities and this has flowed through to share markets too. We may have seen the bottom for the oil price for now at least. West Texas Intermediate Crude (WTI) is up 45% in US dollar terms and Brent Crude is up 34% in US dollar terms for the 12 months to the end of May.
Over the last two weeks we have seen volatility in both currency and equity markets jump. Safe haven buying has taken over as investors brace for the outcome of the UK referendum.
Investors appear to be struggling to come to grips with what will happen if the UK exits the EU (Brexit). Comments are emerging that if the UK leaves the EU this will set the path for others to leave. In turn, this could see the eventual end to the Euro currency experiment.
The US Federal Reserve (the Fed) has been full of excuses when it comes to their rationale for not hiking interest rates. The statements to date are desperately trying to temper expectations around when the next rate hike might be. For the time being the futures market is suggesting a hike is more likely in September or later in the fourth quarter.
The Reserve Bank of Australia (RBA) took another 25 basis points off its cash rate during the quarter. Australia's OCR equivalent now sits at 1.75%. This latest move is yet another attempt by the Aussie central bank to stimulate the economy and get Australia back to being great again. The previous cuts haven’t appeared to work and you wonder how many more cuts the RBA will need to make before we see the ‘lucky country’ return to its former glory.
Locally, the Reserve Bank of New Zealand (RBNZ) left the Official Cash Rate (OCR) unchanged at its Monetary Policy and OCR reviews after previously surprising the market with a cut in March. Inflation expectations remain low and the RBNZ is not expected to move on the OCR again until the third quarter.
NZ shares continued to show the rest of the world the way forward again (yawn, this is becoming really boring). Double digit index returns were not uncommon as at the end of May.
In local currency terms, the NZ market is around 4% to 5% ahead of the major US and European indices as at the end of May. Against the UK the NZX is ahead by a staggering 10% over the last quarter and around 31% better off over the twelve months to May 30. We expect these sorts of margins to continue to the end of the June quarter.
Aussie shares finally started to deliver some decent returns for investors (in A$ terms) after months of depressing news. Not wanting to pop everyone’s happy bubble, but when we convert these returns into the NZ dollar, they are still negative for the twelve months to May 31.
Global and domestic bond performance is very similar on both a hedged basis so far this quarter. It is fair to describe the recent bond returns as solid, but largely unspectacular. It provides a good counter balance to the equity market where the risk profile and volatility is considerably higher.
Overall we are expecting to see the conservative end of the KiwiSaver funds provide the steady returns investors have come to expect. The more aggressive KiwiSaver accounts continue to be where all the real action and capital gains are being achieved.