Axiome September update 2019

Investment returns and the economic backdrop for September were very similar to those of the June quarter.  As discussed in our last update, central banks have begun easing rates in response to a slowing global economy and the risk that ongoing trade wars will drag economies into recession.  The US Federal Reserve cut interest rates by 25bps in both July and September, bringing the US Federal Funds rate to 1.75%.  Our Reserve Bank has been quicker off the mark, with RBNZ cuts in May and August reducing the OCR to a record low of 1%.  Fourteen emerging market central banks also cut rates in August – the largest number of concurrent cuts since the global financial crisis in 2008.

In response to this, interest rate sensitive asset classes including government and corporate bonds, listed property, and infrastructure stocks have rallied very strongly.  Equities have also fared well across most markets so far over 2019, with many reaching new highs (Figure 1).  International developed market equities increased by around 7.7% over the September quarter and 25% in the year to date (in NZD terms).  However, given the large decline in markets in December 2018, the return for the year ended September 2019 was materially lower at around 7.7%.  In addition, our currency has flattered international equity returns over the year.  The NZD has fallen around 10% against the USD since September 2018 in response to the RBNZ cutting interest rates significantly lower than US rates.