Divergence creates a land of opportunity
Global markets were choppy in August with generally weaker asset prices, although there was a wide range of outcomes across bonds and shares. This divergence is partly reflecting the recent fortunes of various economies, with the US (strong) and China (weak) at opposite ends of the spectrum. Most funds ended the month modestly lower.
The global economic cycle is impacting different economies in different ways, driven primarily by the sensitivity of different economies to the rise in interest rates over the past 18 months. The US is relatively immune to hikes in the short run, whilst NZ and Australia are very sensitive. Europe is somewhere in the middle. China is also weakening, on a secular and cyclical basis. This is leading to opportunities for us to express views across regions in currencies, bonds and shares. In August, we saw non-US bonds outperform US equivalents, in addition to the NZ dollar falling 3.9% vs the US dollar – trends that we have been positioned for.
New Zealand shares underperformed in August (the NZX 50 fell 4.2%), as reporting season has revealed a tough trading environment for NZ businesses. Our key NZ holding, Contact Energy, bucked the trend as strong results saw the stock rally 0.7% in the month, building on a 6 month return of 12%. In Australia, property company Goodman Group has been investing heavily in data centres, helping it deliver strong results and a stock price gain of 13.7% last month. Global shares were modestly lower in August but some of our picks continue to do well, such as life science company Avantor (up 5.3%), insurance brokers Arthur J. Gallagher (up 7.6%) and Aon (up 4.7%).
The ongoing divergence in global economies, coupled with shifting fortunes for different types of companies, is giving us a large opportunity set to invest in. The medium to long term outlook for returns continues to be healthy. In particular, a slowing in growth should at the very least stop bond prices from falling, allowing the full benefit of strong yields on those bonds to be seen in returns.
