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NZFunds – What’s happening in the market and what we’re doing about it…

Growth is slowing, geopolitical unrest is increasing and NZ Funds has transitioned clients’ portfolios to a more defensive footing in anticipation of a pullback in global share markets. We have decreased risk across the Growth and Inflation Strategies, locking in the strong gains generated this year.

Market view

Global growth momentum is now slowing, and most major economies have progressed toward more advanced stages of the economic cycle. Global trade growth also moved into negative territory, weighed down by the ongoing United States – China trade war.

Share markets have discounted slowing economic data in the hope that interest rate cuts will help avoid a recession. We have already witnessed larger than expected interest rate cuts in New Zealand, with further cuts likely in the United States, Europe, Australia and New Zealand over the coming months.

While the global economy is slowing, a recession is not a foregone conclusion, especially in the United States. We are anticipating a share market pullback and increased volatility in the near future, but we still expect shares and other growth assets to appreciate and provide better medium to long-term returns than term deposits.

Volatility has increased

As interest rates approach zero, volatility has increased. Triggers are geopolitical, such as the United States – China trade war, Brexit, increased tension in the Gulf and South China Sea and protests in Hong Kong. Only time will tell if interest rate cuts will be enough to extend what is now the longest economic expansion in history.

Portfolio changes

Our defensive strategy seeks to lock in the strong returns generated in our Growth and Inflation Strategies this year. As well as increasing our active versus our passive exposure over the past six months, we have implemented three defensive measures. First, we have reduced exposure to global and Australasian share markets. Second, we have invested in gold, a safe haven, that should perform positively during a global share market retreat. Finally, our downside mitigation manager, Universa, provides protection should markets suffer a violent pullback greater than 20%.

What is our strategy?

Central banks are likely to respond quickly to a significant share market pullback. This would be a buying opportunity for those with an 18 – 24-month view. Thus, our strategy is to buy back our underweight share market position on any pullback greater than 20%.

What if markets recover?

If we are wrong and markets grind higher, clients will continue to participate in an appreciating share market. With no new information we will remain defensively positioned. If there is a major positive catalyst, such as a full and final trade deal agreed between the United States and China, we will close out our defensive positioning promptly and increase clients’ exposure to risk assets. We will not take our focus off our core job to track global share market indices over time while generating sustained incremental returns.

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