Economic and Market Commentary for the December Quarter 2021
Market performances were mixed
Market performances were mixed in the December quarter. Bonds again performed poorly, and New Zealand equities couldn’t repeat their September quarter strength. Emerging market (EM) equities treaded water, while developed large cap equities performed well. At the other end of the spectrum property and infrastructure enjoyed exceptionally strong returns.
The performance differences reflected cross-currents in macroeconomic conditions and country or sector specific factors. Rising inflation and the prospect of central banks increasing interest rates weighed down fixed income, but provided strong support to “real asset” classes such as listed infrastructure, property and gold. Developed market equities were propelled by solid corporate earnings and (still) strong growth conditions, while EM equities were held back by lingering concerns around Chinese risks.
Developed market equities climbed further over the December quarter, by around 8.5% in NZD terms. This resulted in an annual return of 28%, while NZD hedged shares increased around 24% (see Figure 1). Within global equities, higher risk small caps had a weaker annual return (18.5%) while value stocks performed in line with the market.
Emerging markets had a softer quarter, falling by around 0.5%. This reflected ongoing geo-political tension with China and concerns around the surprisingly heavy-handed approach that the Chinese authorities have taken to rein in “excess profits” in its tech sector and related listed companies such as Alibaba and Tencent. That said, Chinese growth has remained relatively firm and concerns around property developer Evergrande’s failure severely denting this have dissipated. Australian equities reflected this diminished risk, increasing around 3.5% in the quarter and have returned 17% over the year.
As mentioned above, international infrastructure and property stocks had a very strong quarter. International property rose 10.5% in the quarter and around 30% for calendar 2021. International infrastructure returned around 11.5% in the quarter and 25% over the year. Both of these asset classes have in part benefited from rising inflation and inflation risks as they are expected to be relatively resilient to a higher inflation environment.
On the flip-side, bonds are less resilient to rising inflation and interest rates. As a consequence, New Zealand investment grade (IG) bonds fell 1.4% in the quarter and 4.2% over the year. International IG bonds fared a little better, being flat in the quarter and falling around 1.4% over the year. Finally, NZ cash did better still, increasing by around 0.5% over the year.
Outlook for the years ahead
We do not have a crystal ball to predict what will happen to markets in the months ahead – of course nobody does. But we have recently updated our long-term asset class expected return forecasts, in which we take into consideration the very strong run in growth asset classes over the past 5 years and more, and the exit we are now seeing from ultra-supportive monetary policy and interest rate levels.
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