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Mercer's David Scobie says share markets across the world were buoyant in the past year and New Zealand equities topped the table with an exceptional 32% return

Mercer's David Scobie says share markets across the world were buoyant in the past year and New Zealand equities topped the table with an exceptional 32% return

By David Scobie*

Each year, Mercer­­­ produces its Periodic Table of investment returns.  The Table colour-codes 16 major asset classes and ranks how each has performed, on an annual basis, over the last 10 years.  An interactive version of the Table can be found here.

A glance at the Table, with its scattered array of shades, quickly highlights how challenging it is to unearth patterns and predict what the years ahead may hold.  Last year’s stars at times shine again the next year, and at other times fade out to occupy the bottom ranks. 

Looking across the past decade, a number of observations can be made:

  • 2019 proved to be a very strong year for financial markets.  Every investment sector depicted generated a positive return - not normally a common event but the third time this has happened in the last four years.  2018 provides a contrast when 10 out of the 16 asset classes delivered a negative return.
  • Share markets across the world were buoyant in 2019 and New Zealand Equities topped the table with an exceptional 32% return.  Companies such as Fisher and Paykel Healthcare, Restaurant Brands and Port of Tauranga led the way.  A low interest rate environment and a relatively robust economy underpinned the strength of our market, which has now bettered our Australian counterpart for nine years running.
  • Both New Zealand and Global Fixed Interest delivered solid single digit returns last year alongside a general fall in interest rates – adding to the number of offshore bonds trading at negative yields.  While they couldn’t compete with the riskier asset classes, bonds gave a helpful boost for conservative investors. 
  • Further down the Table, Cash and defensively-oriented Hedge Funds delivered modest returns in 2019.  Both have been regular inhabitants of the lower half of the Table over the past decade.  The same can be said of Commodities which, hampered by a low inflationary environment, produced a negative return in six out of the last 10 years. 
  • The biggest asset class bounce last year was Global Small Cap Equities, recovering from a -9% return in 2018 to generate +25% in 2019.  Certainly a lesson in volatility for investors in that sector. 
  • There were few sizeable falls from grace in 2019.  Having taken first ranking in 2018, Global Private Equity drifted down the rankings.  However, to put this in context, the asset class has placed in the top half of the Table an impressive nine times over the past decade, benefiting those investors with tolerance for some illiquidity. 
  • Across the decade, the award for single highest annual return goes to Emerging Market Equities (+35% in 2017).  The sector also had the second-to-worst year with a -18% return in 2011, under-cut only by Commodities in 2015.
  • Overall, last year’s asset class returns were grouped within a 30% top-to-bottom range - similar to the prior two years’ and to the average for the decade as a whole.

Diversified funds, including those offered via savings plans (such as KiwiSaver), tend to have exposure to a collection of the asset classes contained in the Periodic Table.  Being well-exposed to growth assets was the recipe for high returns in 2019, but even those investors with relatively conservative portfolios should have had a pleasing year. 

We can never tell with a high degree of confidence what the future will hold for financial markets.  Their inherent volatility continues to be a reminder of the merits of asset class diversification.  For many investors, a key takeaway is the importance of harnessing both time and patience - the big money to be made is often not in the buying and selling but in the waiting.


*David Scobie is Head of Consulting at Mercer Investments, based in Auckland.

This article does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances.

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8 Comments

So we're near a correction?

A monkey could make money in these markets.

Yes , and it was a better return than Housing investments

But when you factor in that you can get a house with 5% equity, it's peanuts.

What does that mean? An annual ROI of 32% is not good enough for NZ investors because of our property market?

DoTheMath,

Given your non-de-plume, I will assume that you are numerate. Just how many people are able to buy a property with a 5% deposit? Very few is the answer. Just go to your bank and ask the question. Most need a 20% deposit.
So, a gain of 32% is peanuts. What you don't say is why and that must be based on leverage. Thus, for those who can get a mortgage with a 5% deposit and then see their property gain 5% in value over the following year, the effective gain on their capital is 100%. Of course, that fails to take account of all the costs involved in the purchase and such things as rates and insurance, but the principle is there. You also fail to mention the effect of a price fall; thus, a 5% decline would be a 100% loss.
I certainly do not view my substantial gains last year as 'peanuts' and unlike a property, I can easily take some or all of these gains in cash.

Share markets across the world were buoyant in 2019 and New Zealand Equities topped the table with an exceptional 32% return. Companies such as Fisher and Paykel Healthcare, Restaurant Brands and Port of Tauranga led the way. A low interest rate environment and a relatively robust economy underpinned the strength of our market, which has now bettered our Australian counterpart for nine years running.

Courtesy of Hussman :
The idea that “low interest rates justify high stock valuations” is really a statement that “low interest rates justify low expected stock returns as well.” Those high stock valuations are still associated with low prospective future stock market returns.
Worse, the notion that “low interest rates justify high stock valuations” assumes that the growth rate of future cash flows is held constant, at historically normal levels. If, as we presently observe, interest rates are low because growth rates are low, no valuation premium is “justified” by low interest rates at all.
Presently, the combination of record low interest rates and record high stock market valuations does nothing but add insult to injury.

...the iron law of investing is that a security is nothing but a claim on a future stream of cash flows. Valuation is a crucial determinant of long-term returns. The higher the price an investor pays for those cash flows today, the lower the long-term rate of return earned on the investment..
The corollary is also true. The lower the long-term rate of return demanded by investors, the higher the price moves today. So clearly, changes in investors' attitudes toward risk will strongly affect short-term returns. If investors become more willing to take market risk, it is equivalent to saying that they are demanding a smaller risk premium on stocks (that is, a lower long-term rate of return). Prices rise as a result. Now, the fact that current stock prices are higher also implies that future long-term returns will be lower, but that's part of the deal.

Turned my portfolio over 4 times in the past 2 days, pure profit. Can you do that with your rental property? Catching on yet NZ or are you happy being feed stock for the realestate and banking sector.

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