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Brexit, Trump and the end of the bond market rally and what it means for KiwiSavers


2017 may be a new year in terms of the calendar, but for investment markets it is really just a continuation of 2016. Why? Because we still have to deal with the consequences of two monumental events: 1) the UK’s Brexit vote and 2) U.S. President elect Donald Trump being confirmed as the next leader of world’s largest economy.

Our friends at Vanguard have renamed 2017, Year 1 A.B (After Brexit), which is probably quite appropriate as we enter a new paradigm of uncertainty.  

While we don’t have a crystal ball, several commentators are forecasting a year that consists of increased uncertainty and geopolitical risks: rising interest rates in the U.S. over the course of the year; an end to the multi-decade bond market bull run; global growth slowdown; and a continued bearish outlook for the Chinese economy.

Putting these expectations into context for Simplicity KiwiSaver members this could mean the following for each of the portfolios we manage:

  • The Conservative Fund returns are constrained as the portfolio is heavily weighted to fixed income investments which traditionally underperform shares when interest rates rise. Bond markets have had an extraordinary run of positive returns over the last three decades and if this ends we should see capital losses in conservative portfolios across the globe. The small exposure to equities should help limit losses from the bond components, but they won’t completely offset each other.

If markets experience increased uncertainty and volatility, we could see a reversal in bond markets as investors sell shares and buy relatively low risk investments such as cash and bonds.

  • The Balanced Fund which has a fairly even mix of bonds and shares will in all likelihood see its returns vary with the fortunes of the various markets. We’d expect this portfolio to provide investors with returns that fluctuate a little bit but overall be between a reasonably tight range.

One factor that could derail our expectations on returns for the Balanced portfolio is if we hit a perfect storm scenario when bond and share markets fall at the same time. Normally these two markets move in opposite directions but we have seen periods where they have been closely correlated.

  • The Growth fund which is roughly 85% shares should continue to provide investors with positive returns but expect some bumps along the road as markets deal with the Trump and Brexit impacts. The continued bearish outlook for China will likely have some flow on effects for share markets (especially in Asia and some emerging markets). Measuring the impact of the slowdown in China for investors is difficult and will depend on whether Chinese officials can orchestrate a soft landing for their economy.

Donald Trump is the joker in the pack and his first 100-days in office will set the tone for the rest of \"Year 1 A.B.\" 

The irony in all this is that New Zealand looks a comparative safe haven, as we wrote about recently. We cannot escape the impact of international markets, and all our funds are exposed in some way to them. But, all our funds also have exposure to New Zealand investments and are 100% hedged to the NZ dollar, so the funds will benefit from any relative strength in New Zealand vs the world in 2017. 

This is all in the context of our passive approach to investing, preferring to get a broad market exposure. Our funds have over 9,000 investments in 23 countries. We don’t take bets on which markets, sectors or companies will outperform. Diversification across markets, sectors and companies has proven time and time again to be one of the keys to reducing risk across a portfolio and protecting an investor's capital.

No matter what happens, don't panic. It is important to remember that KiwiSaver is a long-term retirement savings plan, not a get rich quick scheme. Stick to a strategy you are comfortable with and don't go chasing the quick gains or the latest short-term trend or fad.

*Source: Vanguard 2017 economic and market outlook: \"Stabilization, not stagnate.\"