Investment Environment Report - August 2019
POSTED ON: 12 August 2019
In this ‘Investment Environment Report’, NZ Super Fund Chief Economist Mike Frith and Portfolio Manager Dan Snowden discuss the possibility of a global recession, the major drivers of the economic and investment environment, and the implications for financial markets and asset prices. They also touch on how the New Zealand Superannuation Fund is responding to current market conditions and what we expect in the future.
Global economic environment
Expectations for global growth have been revised down slightly and this has generated some commentary about the possibility of a global recession. However, most commentators believe a worldwide reversal of growth is unlikely.
Policymakers have responded to the weaker outlook. Central Banks like the United States Federal Reserve have cut interest rates and the Chinese Government has provided stimulus to its economy by cutting tax rates and increasing infrastructure spending. The trade war between the United States and China remains a weight on growth expectations and a successful conclusion to negotiations between the two countries will remove much uncertainty from markets.
At the same time, current investment and employment growth matched with low interest rates suggests there shouldn’t be a big growth meltdown. This doesn’t seem to be a ‘normal’ cycle like we’ve had in the past 20-30 years. There’s no crazy credit expansion over nominal GDP and no inflation, all of which has delivered moderate growth across developed economies for the past decade.
Financial markets and asset prices
Financial markets have been more volatile over the past 12 months than in recent times. Equity markets, which fell towards the end of 2018, rallied hard (rose) at the start of 2019 in response to supportive Central Bank announcements. Bond markets also rallied (bond yields fell), but market behaviour seems more consistent with a view of persistent low growth and low inflation. Plentiful liquidity continues to be a characteristic of financial markets and financial assets appear fairly valued as a result. We think there’s approximately $2 trillion in private markets looking for a home.
It’s worth remembering that until the end of last year, most predictions had the US Federal Reserve hiking rates through 2019. Now we’re expecting 3-4 cuts, and we’re seeing the same response from NZ and Australian central banks, as well as fiscal loosening in China, which should provide support for the local and global economy.
The NZ Super Fund’s response
The NZ Super Fund is always fully invested. It starts with our Reference Portfolio, which is designed to deliver a long-term return with the appropriate amount of risk. We then utilise our endowments – our long term investment horizon and known liquidity profile – to introduce active risk and increase the Fund’s risk-adjusted returns.
With the amount of liquidity in markets and financial assets fairly priced, the amount of active risk we are running is lower than we would expect to run on average over a business cycle. However, we are still finding investments that we expect will add value to the Fund. Over the past 12 months or so, we have invested in data centres in North America, rural land, a Portfolio of Hotels and we are looking to increase our exposure to equity factors.
It has been a volatile year, with big market swings. The Fund dropped 10 percent in the fourth quarter of 2018, but got it all back the following quarter. May saw a 4 percent drop, which reversed out in June. The key thing has been to maintain and refine our various strategies to align with our long-term outlook.
What we are expecting
We don’t know what will happen in the future and we don’t invest this way. Our investment framework and long run investment horizon allows us to look through market ups and downs, but also ensures we are prepared for future developments in market conditions.
This report has been prepared as a high level summary of certain matters of interest. It is necessarily generalised and may not be relied upon. It does not constitute financial, taxation, legal or professional advice. Any forward-looking statements in this report are subject to risks and uncertainties, and actual events may differ. No representation or warranty is given as to the accuracy or completeness of this report. To the maximum extent permitted by law, Guardians of New Zealand Superannuation as Manager and Administrator of the New Zealand Superannuation Fund (and its affiliates, officers, employees and agents) exclude any liability and responsibility in connection with this report.