In the first of ASB's Investment Insight series, Chris Tennent-Brown, ASB Wealth's Senior Economist, looks at the current investment environment.
Over the past decade, the New Zealand sharemarket has been a successful stomping ground for investors. But this year it is proving to be a bit fickle.
Between 2012 and 2020, the NZX Gross 50 Index averaged an annual return of 15.19 per cent. The best year was 2019 with an impressive return of 30.42 per cent for investors.
Last year it was a gain of 13.92 per cent but, so far this year, the index has been struggling to get into positive territory as rising inflation and interest rates play a part, as does volatile performance in influential New Zealand stocks. The NZSE gross sharemarket index reached a year's high of 13,558.19 points on January 8 but since then it's gone downhill, though it has picked itself up from a low of 12,145.15 points set on March 9.
By late October, the index was near break-even from its December 31, 2020 close of 13,091.63 points, and on track for its worst year since 2011 – which posted -1.04 per cent.
Yet overseas markets have continued to bear fruit. The Australian S&P/ASX 200 Index is up more than 12 per cent and the bellwether S&P 500 in the United States has risen 21 per cent after hitting a new high on October 21. The Nasdaq Composite Index, laden by high-growth technology stocks, has increased more than 17 per cent.
New Zealand is now experiencing annual inflation of nearly 5 per cent, forcing the Reserve Bank to start hiking the official cash rate (OCR) and therefore creating the momentum for increasing interest rates, both for term deposits and mortgages/loans.
Economists now expect the official cash rate to reach 2 per cent by the end of next year, up from 0.25 per cent in early October. When the Reserve Bank lifted the OCR to 0.5 per cent on October 6, it was the first rise in seven years.
New Zealand's golden period of historically-low interest rates is being punctured. Rates are still low compared to historical levels but there's no doubt they are on the rise.
The impact of higher interest rates is likely to have a dampening effect on economic growth over time, given the level of debt in the economy.
Companies with exposure to the parts of the economy that are growing should continue to perform better. But lower growth, interest-rate sensitive companies such as energy and property may face challenges.
Then there is the impact of inflation on higher energy costs, labour pressures and supply chain issues being passed on to consumers.
ASB Wealth Senior Economist Chris Tennent-Brown gives his take on the economic and investment outlook in the video, looking at the options for investors.
For more investment insights, market updates and information on how to access free KiwiSaver advice from ASB visit asb.co.nz/investor-hub.
These are entirely ASB's own views, not investment advice but we know plenty of experts at ASB who would be happy to chat, if needed.
Click here to read more in this series.