The December quarter capped off another good year for equity investors. Developed market global equities were the best performing asset class in 2013, returning nearly 30% in local currency terms. In contrast to last year, higher yielding growth assets such as global and domestic listed property underperformed the broader market. Rising bond yields reduced the relative attractiveness of these assets to yield chasing investors. This partly explains the underperformance on New Zealand shares, yet domestic stocks still returned an impressive 16.5% for the year.
Rising yields also resulted in cash outperforming both global and domestic bonds last year, with New Zealand government bonds producing their first negative return since 1994. This was reinforced by retail investor rotation out of bonds and into cash and equities during the year.
Equity markets exceeded most investors’ expectations in 2013. In contrast, economic growth generally underperformed expectations. This pattern could be reversed in 2014 if investors expect anywhere near the same returns as last year.
Rising global growth, subdued inflation and accommodative monetary policy does promise another year of healthy equity returns versus bonds. The main risk to this view is if strong US growth leads to a sharper than expected decline in the unemployment rate, and inflation subsequently ticks up as ‘spare capacity’ is used up, which sees the market price an earlier than expected exit from zero rates.
2014 will mark the five year anniversaries of the Global Financial Crisis induced trough in markets and the end of the global Great Recession. It has been tough going ever since, but as we head into the New Year the outlook is a tad sunnier. That’s not to say it won’t be any less challenging; there is still considerable work to be done to secure a brighter, stronger, more robust future.
This Outlook provides our latest thoughts on the global economy along with asset class and portfolio positioning commentary from our Head of Investment Strategy Keith Poore.
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