INSIGHTS

Last year was a difficult one for investors across the board.

New Zealand shares were down 12.0 per cent and world shares declined 18.0 per cent, the biggest falls since 2008, while house prices slumped 14.2 per cent.

Conservative assets also had a tough time, with New Zealand corporate bonds down 5.1 per cent.

We need to go back to 1994 to find a time that shares and bonds were both down in a calendar year.

Against that backdrop, this year looked set to be another challenging one, with slower economic growth and more interest rate hikes expected to pressure markets.

However, it’s hasn’t been too bad at all.

If you prefer to listen to a podcast episode on this topic: 

Alternatively, search 'On Point Podcast' and listen via Spotify or Apple Podcast. 

Here at the halfway point, world shares are up 10.6 per cent in 2023, having rebounded 21.7 per cent from the lows of October last year.

New Zealand investors have seen their returns boosted further by favourable currency moves, with the NZ dollar down against most trading partners.

The local sharemarket has been more subdued than most, but the NZX 50 index is up slightly this year and almost ten per cent above its low point from mid-2022.

Conservative assets have also been solid, with the NZX corporate bond index rising solidly.

A lesson we can take from the last six months is to stay invested, at least partially, even when there’s reason to be nervous.

It would’ve been tempting to head for the hills after a year like 2022, but those who’ve stayed the course will have enjoyed a healthy rebound.

Looking ahead, there is room for optimism.

Inflation is coming down, supply chains have improved and there is evidence of labour markets beginning to ease.

Central banks in New Zealand and the US have almost done enough, even though their counterparts in the UK, Australia and Europe have more work to do.

This bodes well for conservative assets like bonds, which prosper when interest rates stop rising, as well as during periods of economic uncertainty.

For sharemarkets, it’s more difficult to predict whether the resilience of the first half will continue.

Markets have weathered a period of rising interest rates, but leading indicators unanimously suggest weaker activity is ahead.

Some would argue that markets are forward looking and this is already in the price, while others will point to the lags of monetary policy tightening taking full effect.

The latter is a particularly relevant point this cycle, with interest rates having increased at a faster pace than we’ve seen in decades over these last 18 months.

On the local front, there’s also the small matter of the election.

This will likely mean a cautious tone amongst businesses and consumers, with many decisions put on ice until the policy landscape becomes clearer.

Investors should play it safe, but not too safe.

US shares have been up in 52 of the 73 years since 1950, which makes for a hit rate of about seven out of ten.

Over that period, there have been just three occasions where we’ve seen two negative years in a row, the last being in the early 2000s.

What’s more, a positive first half of the year has been followed by a positive second half on 76 per cent of occasions.

Those odds aren’t terrible, so a cautious approach shouldn’t mean staying on the sidelines completely.

It’s also important to remember there isn’t a playbook for how we emerge from a global pandemic. We need to be mindful the traditional economic indicators might not be quite as useful for predicting the future this time around.

Things might not turn out as bad as expected, and any further volatility could bring opportunities for those who keep a positive mindset.