Market performances were mixed in the December 2021 quarter. Bonds again performed poorly, and New Zealand shares couldn’t repeat their September quarter strength. Emerging market (EM) shares treaded water, while larger companies in developed markets performed well. At the other end of the spectrum, property and infrastructure enjoyed exceptionally strong returns.
The performance differences reflected cross-currents in global economic conditions and country or sector specific factors, which pulled markets in different directions. On one hand, rising inflation and the prospect of central banks increasing interest rates resulted in bonds not having a good quarter. On the other hand, those same conditions provided strong support to “real asset” classes such as listed infrastructure, property and gold.
Developed market shares were propelled by solid corporate earnings and (still) strong growth conditions, while emerging market shares were held back by lingering concerns around Chinese risks. Performances were mixed over the quarter. Developed market shares climbed further over the December quarter, by around 8.5% in NZD terms. This resulted in an annual return of 28%, or 24% in NZ dollar terms. Within global shares, higher-risk smaller companies 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. The latter had no impact on Ethical Investing NZ’s Sustainable portfolios as these specifically exclude emerging markets. Australian shares 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.
As we’ve said often, that’s the value of having portfolios that combine both shares and bonds- when one sector is down, another may be up, resulting in a more even performance. Ethical Investing NZ’s portfolios are carefully designed to do this.
And what of the future?
We do not have a crystal ball to predict what will happen to markets in the months ahead – of course nobody does. But our research house MyFiduciary has recently updated its long-term expected returns for different asset classes. This takes 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 strong governmental supportive monetary policy and interest rate levels.
To find out more, please get in touch!
Through the ups and downs, we are confident that our clients’ portfolios are well-designed to manage inflation and other risks, and that they will continue to offer a better return than cash over the medium to longer term.