Axiome June update 2019

An old investment mantra is “Don’t fight the Fed”.   The Fed in this case is the US Federal Reserve, who sets monetary policy and interest rates in the United States.  Historically investors in the US, and globally given the dominance of the US market, have done well when they have invested in a way that aligns with how the Fed sets its monetary policy.  This pattern has repeated over the past 6 months.

The Fed has now completely backed-off increasing rates in response to a slowing global economy and heightened Trade War risks.  Markets forecast instead that they will cut interest rates, in line with cuts that have already taken place in New Zealand and Australia.  In response, markets have rallied strongly across all asset classes, including government and corporate bonds, property and infrastructure stocks, and equities.  Investors and active fund managers who have reduced their risk allocations in response to the slowing economy – fighting the Fed – have missed out on this rally.

Many equity markets, including New Zealand’s reached new highs in the quarter (figure 1).  International developed market equities increased by around 5.5% over the quarter (in NZD terms), implying around a 7% return for the year ended June 2019.  Within global equities, value stock and small cap stock returns are a little weaker returning around 4% for the quarter. Emerging market (EM) equity returns were weaker at 2% over the quarter, but this was enough to turn their annual return to a small (2%) positive figure.