We have made it through the first quarter of the calendar year, which in the smallest part of the world means that summer ends and autumn / autumn is present. It also means that we are three quarters of the way through our fiscal year, which makes it good to find out what's happening in global and local markets.
It is fair to say the last six months have been a bit of a roller coaster and there is a real feeling, locally and internationally, that there is an economic chill coming.
If I were to revise 201
As the market reacted poorly, the Fed responded quickly and stopped its normalization process and balance. The European Central Bank also made clear sounds and the kisses of life were given to the stock markets, which went hard during the first quarter of 2019.
Global equity markets selling over 13% in the December quarter rose nearly 12% in March quarter .
We definitely felt the volatility of NZ Super Fund. We went from a net rating of $ 41 billion in early October to 37bb at the end of December and back to over 41bb at the end of March.
Not fun for the weak in heart, but something our investment framework is designed to resist.
In the fund's annual report last year, we talked about the possibility of significant market volatility and what it would mean for our short-term returns. But most importantly, we also talked about our biggest risk – losing our nerve, closing our positions and locking in our losses. As a fund with no significant withdrawals until the 2030s, we can take a long term and look to make money in the financial markets that dart around the last six months.
So we have come through this period relatively unscathed but it is fair to say that market participants and commentators have been a little shattered and worried about global economic prospects.
US benchmark 10-year bond yields fell (declined) 86 basis points from early November to late March as markets bought in Fed's lazy view and added the negative sentiment emanating from Europe and China.
The 10-year three-month yield curve short-term inverted, causes alarm bells of a coming recession, as it has been seen previously. Markets are now pricing next step by the Fed to be down at the end of this year.
Locally, the story is very much the same. The smell of weaker domestic demand and business confidence has seen Reserve Bank break down and commentators are now calling for official rate cuts this year, and next year, in some cases, to boost economic growth.
I've often found out that at this time in the bike it is not unusual to see conflicting data releases – some point to weakness, some to strength or stability. As a result, you tend to see markets whipsaw around according to the latest data points.
But the underlying momentum remains – the latest US job report was good, and global commentators have not yet taken the ax to their growth forecasts. In addition, it seems that the United States and China are close to solving their trade spat, which will stabilize global growth and give a tonic to the global environment
As a result, I do not expect the wheels to come out of the local or global economy. And although there is a bunch, the central banks seem to respond, although only the dollar bloc countries – the United States, Canada, New Zealand and Australia – really have some kind of political ammunition. So if we see a run of weak data – maybe only need two or three outbreaks – the trigger will probably be pulled.
On the tax front, many Western governments have a high level of debt, and I am not sure how much main space they have. You will usually have governments making profits and paying debts when economies grow so they can react when economies weaken, but that hasn't happened in recent years.
In New Zealand, successive governments have repaid the debt, so there are plenty of headroom to provide fiscal stimulus to the local economy, if needed. However, the current government has set its stalls on its debt-to-GDP targets. It will be interesting to see if this attitude changes if the domestic economy is weakened, as expected by the Reserve Bank, and companies begin to deploy employees.
So what can you expect for the rest of 2019 – a ceasefire between China and the US and momentum will keep the global environment stable while central banks will maintain a deaf tone. The markets will jump around a little, but I expect that the year will not close much differently than where we are now.
Mike Frith is chief economist for NZ Superannuation Fund.
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