March Investment Comment (written 4 April 2012)

Index results for the month of March 2012 Australasian Shares Global Shares NZ Bonds Global Bonds Currency Markets Developed share markets The strong start to the year for markets continued in March albeit at a slower pace. The top performing markets were NZ, Belgium, Ireland and the USA with the S&P 500 up 3.1%. The poorest performing markets were Spain, Hong Kong, Austria and Italy. Over the 3 month period the MSCI World was up 11.2% in local currency terms and 6.2% in unhedged terms. Over the year the returns were 1.5% and -6.4% showing the adverse impact of the rise in the NZ dollar. Emerging share markets The top markets were Philippines, Mexico, Indonesia and Peru with the weaker markets China, Russia, Brazil and Hungary. As would be expected with the larger markets amongst the poorer performers overall the emerging markets were down -1.4% for the month. The last year has seen some noticeable variance in the performance of emerging and developed markets. Bonds The month showed some positive but small gains for March for both NZ and global bonds. 10 year New Zealand government stock rose slightly to end the month at 4.05%. Global bond indexes had small positive returns with the BGA up just 0.1% which will have all been due to the impact of hedging. The New Zealand dollar gave away the strong gains since the beginning of the year and was down 2.8% for the month. In contrast a small 1.4% gain was registered against the Australian dollar. Economies The United States economy grew at the rate of 3% per annum in the last quarter of 2011, a positive sign for the future although the growth in jobs remains weak (the unemployment rate was unchanged at 8.3% in February). The Governor of the Federal Reserve has spent time in the last couple of weeks talking to George Washington University students on the GFC and the Feds response to the crisis. While stating that he is confident that the US will return to its long term growth rate of the last 100 years of 3% pa he would not put a date on when this would be achieved. However consumer confidence is still weak with the US Conference Boards consumer confidence index dropping to 70.2 in March from the previous months 71.6 on top of which we have the S&P/Case-Shiller index of property values in 20 cities falling 3.8% in January from a year earlier, matching the median forecast. The banking system remains a concern with 15 of the 19 big banks reviewed passing the stress test. Included in the four who failed was Citigroup. In the Eurozone the main story was the Greek debt swap which was the largest ever restructuring of debt where 86% of the holders of Greek bonds agreed to accept the deal which sees the Greek debt pile reduced by $130 billion. Only 5.3% said no to the deal which allowed the Greek Government to force all the remaining 14% to also accept the swap. But by enforcing the action on the remaining debt holders this triggered a credit event which means that US$3 billion will be paid out through the insurance cover provided by credit default swaps. The NZSX 50 was up 6.0% while the ASX 200 was up 1.2% in local currency terms. In NZ dollar terms it fell 0.1%. The MSCI World rose 2.0% (hedged to the NZ dollar). In unhedged terms, it rose 4.2%. The MSCI Emerging Market Index was down -1.4% in local currency terms. The NZX NZ Government Stock Index rose 0.4%, the NZX Corporate A Index rose 0.7%. The CitiGroup WGBI fell -0.1%, while the Barclays Global Aggregate Index rose 0.1%. The NZ dollar finished down 2.8% at 81.9 US cents and up 1.4% at 79.1 Australian cents.

Investment Comment China reported a trade deficit of US$31.5 billion for February, the largest in at least a decade. The cause was the surge in imports which grew at twice the rate of exports. The chart to the right shows the changing fortunes for the balance of payments for the Chinese, US and Japanese economies. The fall in exports for China adds up to a slowdown in the Chinese economy.
Current account balance (US$ billion)

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800 China
400

Japan USA

In the UK we are seeing the emergence of a -400 st recession with the OECD predicting that the 1 quarter of 2012 will see a -0.4% growth rate on th top of the negative rate for the 4 quarter of -800 1980 1985 1990 1995 2000 2005 2010 2011. March also saw the Chancellor of the Exchequer, George Osborne, lay out his Budget plans which will see a drop in the controversial top tax rate of 50% to 45% from 2013. It rose from 40% under Gordon Brown at the height of the GFC. The tax, seen as negative to business, also had the negative impact that the expected revenue did not materialise. Despite this, sharing the tax burden while meeting the concerns of the lower paid over the salaries paid to some is a difficult balancing act for any government. An interesting story in March was that Lehman Brothers has officially emerged from bankruptcy and can now pay out the $65 billion of assets it holds to creditors. While this is a significant sum, it is small compared to the $639 billion it was holding at the time of its collapse. India is always compared unfavourably to China with most people disappointed with its growth rate. Its growth has possibly been impaired by its lack of a friendly environment to foreign investors and this was confirmed in March where Vodafone now faces retrospective legislation, having won through the courts a case against the Government in regard to taxes after its takeover of an Indian firm. New Zealand While the indications are that the NZ economy is growing strongly there is some concern with the balance of payments trend. The seasonally adjusted deficit for the December quarter showed a deficit of $2 billion, down $0.8 billion on the September 2011 quarter. However the trend is negative. Similarly NZs net international investment position still remains a concern. A monetary statement was released on 8 March leaving the OCR rate of 2.5% unchanged. The Governor noted that the strength in the NZ dollar reduced the need for future increases in the OCR while also noting that given the medium term outlook for inflation it remains prudent to hold the OCR at 2.5%. Outlook There is plenty of confidence out there for the NZ economy, too much in some peoples minds given the fall in commodity prices. Milk prices have fallen by 9% from their high in May last year. With a possible slowing in the global economy and an on going fall in commodity prices the NZ economys future may not be as rosy as some would like to think. There are signs that the consumer is not spending except possibly in Auckland where house prices seem to be in for a surge at the moment. The Government is expected to introduce a zero increase in spending in its May Budget as it struggles to get the countrys finances under control, particularly given the large bill that needs to be met for the Christchurch earthquakes.
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Mark Weaver

4 April 2012

Investment Comment

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Chart Corner
After a very strong first quarter, it is useful to compare 2012 to other years. The chart below shows the performance of the S&P 500 index for the March quarter of each calendar year since 1950.

S&P 500 First Quarter Performance 1950 to 2012

120
110 100 90 80 70 1 Jan

1975 1987

2012

2009 2001

1 Feb

1 Mar

1 Apr

This year has clearly been one of the better starts. The return of 12% is the best result for the March quarter since 1998. We have also highlighted the two best results (1975, 1987) and the two worst results (2001, 2009) for the March quarter. It is interesting to see how these years panned out. The chart below shows the full year results.

S&P 500 Calendar Year Performance 1950 to 2012

140
1975

120 2012 100 80 60 40 1 Jan

2009

1987

2001

2008

1 Mar

1 May

1 Jul

1 Sep

1 Nov

1 Jan

1987 went from one of the best starts to being about flat for the calendar year, while 2009 rebounded from an extremely poor first quarter to end the year up 23%. For the record, the best year in this period was 1954 (+46%) and the worst was 2008 (-38%).
Source: Yahoo! Finance