International shares in the doldrums

By BRENT SHEATHER

Three months into the new year and there are increasing signs that the world economy is recovering from recession and the events of September 11.

However no one appears to have told sharemarkets; international shares remained virtually flat in the quarter, when measured in US dollars, and are down 5.4 per cent in New Zealand dollar terms.

Despite a record two bad years in a row there is little in the way of good news for international share investors.

Could the doldrums last another year? On the basis of history, three down years in a row is unlikely. That has only happened twice in the last 80 years - in 1939-1941 and 1929-1932. But then again, the length and excesses of the last bull market were pretty extraordinary too.

Not surprisingly, bond investors have had a particularly torrid time in the last three months with inflation worries pushing global bond returns down by 7.1 per cent, although 6.1 per cent of that resulted from the rising value of the kiwi.

In another pointer to the risks of inflation note that the gold price is on the move and global gold shares have risen by 32 per cent in the quarter.

Faced with sluggish equity and bond markets it will come as no surprise that the average pension fund and balanced unit trust which so many New Zealanders use to save for their retirement did not have a great quarter.

Long-term balanced funds typically put around 40 per cent of their money in bonds, 10 per cent in property and 50 per cent in shares, with a third of the share component invested locally and the rest overseas.

If we apply these weightings, and see how the respective indexes have performed, we get a 1.9 per cent decline in the quarter (before tax and fees) and a 1 per cent fall for the 12 months ended March 31.

While the short-term statistics are depressing, the longer-term numbers look much better; over 10 years a diversified portfolio has returned 10 per cent a year, well above the 7.8 per cent for Government stock.

So what has worked in the last year?

Don't say it too loudly but Auckland residential property, shunned in the last few years, has posted a 7 per cent gain, including rental income less expenses, confirming yet again that as soon as the herd fall out of love with one asset class and in favour of another the reverse of what is expected to happen usually happens.

Similarly, New Zealand shares have had a great year with the broad index returning 11 per cent and smaller companies rising by an amazing 26.7 per cent.