Returns fall but still running

It would be premature to call an end to the bull market, but investors need to pare back their return expectations amid an increasingly volatile environment.

And central bankers, rather than China’s flagging economy, pose the biggest risk to equity markets in the longer term.

Those are some of the risks highlighted by JBWere New Zealand’s Investment Strategy Group, whose latest asset allocation update describes the global economy as “stuck in third gear”.

Last week, the United States Federal Reserve opted to keep interest rates unchanged within a zero to 0.25 per cent range due to heightened uncertainty in world markets.

The US interest rate setting has been a major contributor to the equity bull run that has taken place over the past several years.

JBWere said an eventual US rate hike was not an “insurmountable hurdle” for equities.

“Our focus is the dynamic between wages, growth and inflation. Strong growth, accelerating wages and rising inflation are what have historically hurt equity markets. Why? Because it is this dynamic that turns the Federal Reserve from growth cheerleader to punch-bowl remover.”

JBWere strategist Bernard Doyle said central bankers became dangerous for equity investors when they began worrying about inflation and hiking rates accordingly.

“At the moment no central banker in the world has that as a real concern,” Doyle said. “It’s when we get far closer to that point that we’ll start worrying about an end of the bull market.”

But Doyle said JBWere had been “dialling down” clients’ return expectations. “A double-digit (return) year in equities is not the norm.”

The S&P/NZX 50 Index gained 18 per cent in 2014, following a 16.5 per cent lift in the previous year.

As of Friday afternoon, the index was up only 2.7 per cent in the year to date and 4 per cent below its August 3 peak.

JBWere’s New Zealand equity manager, Rickey Ward, said investors often associated bull markets with double-digit returns.

“A bull market can still be high single-digit returns – it’s just positive sentiment around a market rather than the actual return you get from it,” Ward said.

But, with volatility increasing, JBWere has been putting clients into overseas hedge funds, which can profit in both rising and falling markets.

“A big push for us has been filling out our suite of low-correlation assets, including hedge funds,” Doyle said, adding that seven of the eight hedge funds JBWere clients were invested in had positive returns in August, one of the most volatile months for equity markets in recent years.

Ward said the local sharemarket’s recent “pull back” was creating buying opportunities. “Fletcher Building is a good example – look back a year ago and it was trading above $9, or close to. It went to $6.95 the other day and on what new news? The economy’s still pretty strong and Fletcher has got a forward order book of $2.4 billion … for any long-term investor that presents an opportunity in a very good company.”

Doyle said he didn’t think the Chinese economy was heading for a so-called “hard-landing”.

“We think it’s a bumpy, managed slowdown,” he said, adding that a severe downturn would put political stability at risk. “A (Chinese) recession would have political ramifications that they’re keen to avoid.”

NZ Herald – 21 September 2015