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Trade, tariffs and Trump wreak havoc on markets in May

12/06/2019

The Sell in May and go away cliche may be resonating with investors this month on the heels of a much cheerier start to the year.

Without a doubt, May was a tough month for investors with US markets recording the second worst May month since the 1960s.

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Blame trade, tariffs and the mighty Donald (Trump).

At the same time as escalating trade wars with China, the US President turned his temper to Mexico, threatening to impose a 5% tariff on imports to America. The issue was quickly resolved with promises by Mexico to curb migration flows. 

China last month announced plans to increase tariffs on US$60 billion worth of American goods in retaliation for Trump's latest penalties on Chinese products. A duty of between 5 to 25% took effect June 1st on about 5,200 American products, including batteries, spinach and coffee.

The move was a reaction to the U.S raising duties on US$200 billion of Chinese imports from 10% to 25%. 

Closer to home, Australasian shares bucked the trend again in May.

Both NZ and Australian sharemarkets were up 1% from April. Australian shares rose on the back of the surprising election results there, further enhanced by soaring commodity prices.

NZ Shares continue to go from strength the strength and provide investors with strong double-digit returns for an extended period. 

Historically, the New Zealand Stock Market (NZX50) reached an all-time high of 10263.41 in May, set against a record low of 3202.02 in December of 2011. Since the beginning of 2019, the NZX50 has increased 1381 points or 15.81%, according to Trading Economics analysis for the month.  

The yoyo effect of markets overseas had the net effect of pulling down performance for most diversified KiwiSaver funds.  

Our Balanced and Growth funds, were both in negative territory for the past month. The Conservative funds were marginally positive as global interest rates fell. 

Simplicity’s NZ bond fund and NZ share funds continue to show resilience in the face of volatility offshore. 

Major central banks held interest rates steady while our own Reserve Bank decided to cut the official cash rate further by 0.25% to a new low of 1.5%. Meanwhile, the Australian central bank was left red-faced having to take responsibility for a typo on the $50 banknote.

Any further cut to interest rates in NZ would surely see a rotation from term deposits to shares in a hunt for higher levels of income. We caution conservative minded mum and pop investors to understand the risk of doing so given a low level of understanding among first-time investors. 

US 10-year treasury yields fell to their lowest point in nearly 2 years. Market participants are pondering a future US rate cut. The US Fed chair has signalled the central bank will take the steps necessary to sustain US expansion, which is code for they will cut rates if necessary.

The Kiwi dollar was down just over 1% on a trade-weighted basis. The GBP is the only major currency that the NZD has not depreciated against recently and this is almost certainly Brexit related. After peaking against the USD at 0.6681 on May 1, the trend for the rest of the month was downward.

Our hedged position on the international portion of the portfolios has had a negative impact on the overall returns. Long-term, our view is that the hedge is beneficial for KiwiSaver funds.

Fund returns  

The following fund data is to 31 May 2019. Note these returns are before tax, and the $30 per annum member fee but after the 0.3% per annum management fee.

 

Name Inception
Date
Since
Inception
Annualised
1
Month
3
Months
6
Months
1
Year
2
Years
Annualised
KiwiSaver Scheme
Simplicity Growth Fund 01.09.16 9.34% -2.19% 2.67% 5.66% 6.30% 8.47%
Simplicity Balanced Fund 01.09.16 6.88% -1.24% 2.69% 5.48% 6.31% 7.02%
Simplicity Conservative Fund  01.09.16 5.18% 0.37% 2.87% 5.45% 6.81% 5.41%
Simplicity Guaranteed Income Fund 24.10.17  5.12% -1.19% 2.06% 4.66% 5.36%  
 
Investment Funds
Simplicity Growth Investment Fund 03.04.17  8.27% -2.20% 2.65% 5.68% 6.47% 8.41%
Simplicity Balanced Investment 
Fund
03.04.17  6.79% -1.22% 2.70% 5.72% 6.42% 6.91%
Simplicity Conservative Investment 
Fund
03.04.17  5.32% 0.36% 2.86% 5.44% 6.82% 5.23%
Simplicity NZ Bond Fund 03.04.18  7.29% 1.27% 2.73% 5.14% 7.94%  
Simplicity NZ Share Fund 03.04.18  19.64% 1.29% 8.95% 14.87% 18.46%  

 

A note on returns. From time to time there will be small differences in the returns between the KiwiSaver scheme and Investment Fund returns. Some of the differences can be attributed to either small differences in asset allocation, timing, and reinvestment of cash flows and transaction costs (i.e. brokerage) or a combination of these factors. Past returns are not a guide to future potential returns.

 

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