It’s been four months since we wrote in this commentary that the market was undecided between whether recent market rallies were pointing towards an impending correction (a euphemistic term used to describe a sudden drop in prices), or the foundations for further expansion. The ongoing strong returns investors have enjoyed in the diversified funds could suggest that any nervousness at that time was unfounded, but it may be that the headline figure is a little misleading.
The New Zealand equity market has indeed continued to surge upwards, with a further 3.4% uplift in July taking the year to date return to well in excess of 20%, but given the weakening business and consumer confidence this probably tells us more about the ongoing demand (locally and offshore) for our higher dividend paying companies than a reassessment of the fundamental valuation of NZ businesses. This line of thinking is perhaps strengthened when considering that during the month bond yields fell further leading to gains for investors of around 0.7% (both domestically and on the broader global aggregate bond market). Global shares were solid over the month, but during the past three months have fallen slightly and only look more positive when allowing for the weakened NZ dollar which results in a boost to assets held in foreign currencies. When also noting that the gold price during the month of July reached highs not seen in over 6 years, and that the US federal funds rate (equivalent to our OCR) was reduced for the 1st time in 10 years, there are increasing signs that markets are anticipating a period of ongoing weakness.
Overall, investors in the Nikko AM diversified funds have enjoyed another month of very strong returns (1.4%, 2.1% and 2.5% for the Conservative, Balanced and Growth funds respectively) and this has contributed to gross returns for the past 12 months that are higher than our long term assumptions, but looking forward we are anticipating a future period of lower returns. We will continue to maintain good diversification across sector, geography and strategy and will maintain our search for opportunities to add value over and above general market returns and reiterate that our mind-set continues to focus on the longer term.