Monthly Commentary | October 22

The fall in markets in August accelerated through September, and by the end of the month many major markets had slid back to the lows seen in mid-June. Global share markets led the lurch downwards, and in aggregate falling by more than 10% in local currency terms. For NZ investors the sharp fall of the NZ dollar meant that in NZ dollar terms an unhedged portfolio of global shares fell by just 2%, again showing the benefit of foreign currency as part of a diversified portfolio.

 The NZX participated in these losses falling more than 3%, and the sub-sector of companies making up the REIT index (ie listed property) falling over 6%. As we’ve seen throughout this inflation induced, supply constrained shock, bond markets didn’t provide investors with some offsetting gains.

Global bonds (as measured by the Barclays global aggregate index) fell 3.5%, and local NZ bond markets were down around 1-1.5% depending on the index. It seems that at the moment, markets are struggling to find reasons for confidence and the general mood is that economically and geo-politically things will get worse before they get better.

A key question for markets is the degree to which this uncertainty and lack of confidence is now priced in and/or what new news may result in further falls or the first shoots of stability for future growth. It’s tempting to want to ‘opt-out’ during such times and then re-engage with markets when times are calmer; the major problem with such an approach is that periods of calm and stability are usually preceded by a large upwards re-rate in markets and so by being on the sidelines you don’t participate in the upswings.

An excellent illustration of this is an analysis on the S&P500 which over a 20-year period has averaged a return of ~7% p.a. However, if you’d missed out on the 40 days (out of over 5,000 trading days) of the largest returns you’d have had a loss of 2.8% p.a; and even missing just the best 5 days would have seen the 7% p.a. gains reduced to just 5% p.a.