Investment returns (before tax and fees)* for the quarter ending 31 March 2023 are:

This latest quarter saw better returns than last year when interest rates rose (both bond and shares prices fell). The first quarter of this year began with positive sentiment on the growth outlook as energy costs fell and China’s economy reopened.

Due to swift action by the regulatory authorities, the global banking sector now appears less of a concern. However, those actions may result in slower credit creation, which could lead to slower growth (e.g. tighter lending standards as banks become more cautious).

The banking concerns in March dwarfed concerns around inflation. As markets reacted to fears of a banking crisis, government bond markets went from pricing in rate hikes (i.e. falling bond prices) to pricing in rate falls later this year (i.e. where bond prices rise).

Global equities also gained in the quarter, buoyed by declining recession worries in developed markets.

Locally the Reserve Bank of New Zealand (RBNZ) surprised the market in February 2023 with a 50 basis points increase in the Official Cash Rate (OCR), thereby lifting the OCR to 5.25%. The concern is that the domestic economy may already be slowing. The RBNZ is expected to increase the OCR by another 25 basis points (to 5.50%) in May 2023. The market’s attention could then increasingly focus on the timing and extent of the next easing cycle.

Despite the banking sector concerns, Central Banks continued to fight inflation with tighter monetary policy (via official cash rate increases).

While there were signs that hiking cycles were already biting (particularly in housing markets), we think the full spill-over effects to the broader economy are yet to come.

In our view, the inflation outlook is mixed. Whilst inflation appears to be reducing (largely on the back of lower oil prices), we remain concerned that demand still appears to be strong, for example, food and rental prices. Wage growth in this tight labour market is also keenly observed.

In April 2023, the International Monetary Fund (IMF) warned that the recent turmoil in global banking systems would slow global economic growth. In their latest Global Financial Stability Report, the IMF said the financial markets remain fragile and stressed. Whether the measures taken so far have been sufficient to fully restore confidence in markets and institutions remains to be seen. The IMF expects global economies will grow 2.8% in 2023 and 3% in 2024. Each of these forecasts has been revised down by 0.1% since January. In 2022 global economies grew by 3.4%. IMF expects global inflation of 7% in 2023, slightly down from the 8.7% achieved in 2022. Growth predicted by the IMF is the lowest in 20 years.

We remain cautious about the outlook because the rapid increase in interest rates will have a long and variable lag effect on the economy. Higher rates are still to impact the real economy fully. In addition, any tightening of credit standards (reduced lending) and increased capital costs for banks will weigh on the economy. We see risks to both bond prices (interest rates) and earnings growth (share prices).

In this environment, we remain cautiously invested and diversified and continue to hold higher-than-normal amounts in cash.

The same main themes that applied in 2022 will again dominate in 2023. Those key themes revolve around the outlook for inflation, interest rates and growth. These are common every year but are particularly of concern at present.

Central banks have reversed their growth-enhancing policies. Interest rates rose significantly in 2022 and negatively impacted share prices. We believe interest rates will have a significant bearing on future returns. Will interest rates rise further this year? It is widely acknowledged that earlier interest rate rises have a delayed impact on the economy. Exactly how long the delay is and how deep the impact is varies depending on the area of the economy, e.g. mortgages, borrowing, business investment, consumer spending etc. There is still a lot of uncertainty about how labour shortages will affect the outcome. The fear is that labour shortages will result in wage growth, leading to higher inflation. These and other factors should determine how fast inflation numbers come down. Any geo-political developments could also surprise.

The World Bank has revised its 2023 economic forecasts. It was, in January 2023, expecting global economic growth of just 1.7% this year. If its predictions are accurate, that will put economic growth in 2023 at its third lowest level in the past three decades, behind 2009 (Global Financial Crisis) and 2020 (COVID-19).

There is little doubt, though, that whatever eventuates, the markets could fluctuate wildly at times. Rest assured, as we have mentioned previously, we are doing our best in these times of heightened uncertainty to look after our members’ interests. The portfolios remain diverse, and we focus on investments that we believe are more at the quality end of the spectrum.