Market Update: Rising Bond Yields, NZ Election Impact and Cash is Still King

There’s been a lot happening around the globe in the past few months, with investors working out what all this means for them, interest rates and investing.

We are not fans of crystal ball gazing – the accuracy of both weather forecasters and economists is surely evidence enough of how fickle that can be. However, there are plenty of themes that investors can benefit from being conscious about, and we look forward to a nice hot (but not too hot!) summer.

In this blog, we take a look at the emerging economic themes, digging into the details and sharing insights as to what this means for your savings or investments.

In September, the major market development was the significant rise in bond yields. This was driven by the perception of a persistently hawkish US Federal Reserve (Fed) and the expectation of higher interest rates in the US.

Hawkish simply means that central bankers are indicating increasing interest rates in the future. It led to a steepening in US bond yields, with one of the largest quarterly movements in 40 years.

Consequently, US 10-year bond yields reached levels not seen since July 2007, before the Global Financial Crisis. Both US 20 and 30-year bond yields also reached multi-year highs. The increase in yields was primarily due to rising real yields (bond yields that are adjusted for inflation). Additionality, US inflation data has continued to come in higher than was forecast.

In the face of declining energy prices, robust US payroll figures, job growth and overall economic performance, US inflation was slighty higher than expected at 3.7%. Overall, perceptions are that the economy is gaining momentum, which could support further increases in interest rates as the Fed works to re-establish control over inflation.

As bond yields and the expectation of higher interest rates rose in September, the surge in global bond yields had a pronounced impact on growth assets. Most major local and global share market indices were hit, as seen with the Kernel Global ESG Fund (unhedged, after fees, before tax) experiencing a 5.4% decline in September, while the Kernel S&P 500 Fund (NZD Hedged, after fees, before tax) recorded a 4.7% drop.

Defensive assets were not immune to the pressure either. The listed infrastructure sector declined and the Kernel Global Infrastructure Fund (NZD Hedged, after fees, before tax) saw a 3.8% decrease. Bonds underperformed cash, but it's worth noting that the Kernel Cash Plus Fund had another positive month, maintaining its leading position among peers, albeit with a more subdued performance.

Well, for those long-term investors, not much. It’s easy to be reactive to short term movements like this; to start over analysing headlines and seek to adjust your investment strategy. However, this is often the worst way to build long-term wealth.

So far in October, markets have been positive as bond yields have started to decline again. If an investor sold out at the bottom of the market (i.e. when the value of bonds/shares etc is the lowest), using the above Kernel Global ESG Fund as an example, they would have already missed out on 3.0% of recovery in the month to 17th October.

This applies to KiwiSaver too. Switching from a high growth to conservative KiwiSaver fund when it doesn’t align with your personal circumstances can be damaging.

Like we saw during the COVID market drop, many investors reacted to markets and switched their fund type from high growth to conversative, crystalising any losses when the market recovered (had they not switched back to high growth).

That said, remember that it is absolutely fine to switch between similar risk profile KiwiSaver funds with different KiwiSaver providers at any time.

As the final government composition is still uncertain, we don’t yet know what policies will be adopted and what impact they may have. What is expected is some income tax changes to rates and brackets, to increase incomes.

With relation to KiwiSaver and retirement, we've summarised the key policies advocated for by each potential coalition partner below.

Looking at the policies, we wish for a longer-term view that supports greater financial planning and fuelling the backbone of our collective infrastructure and prosperity. Whilst there are some potential tweaks around the edges, there aren’t any fundamental policy changes that would make savings using KiwiSaver or other investments less important for you today or in the future.

Long-term wealth is driven by the habits you create; staying engaged, staying invested, keeping costs low, being well-diversified and by taking a long-term view.

With interest rates rising from almost zero to over 5%, cash and term deposits have become popular – earning more income for those with savings or an emergency fund. Over the year to August 2023, residential savings in Term Deposits increased 21%, reaching $185 billion.

At the same time, transactional balances and savings account balances fell – likely reflecting the higher cost of living for many Kiwis.

While long-term investors should continue to focus on long-term growth assets, such as diversified shares index funds, investors can now get much higher returns on their short-term savings than they could a few years ago.

If you do have short-term savings goals, such as a house purchase or some savings to top up retirement income, then you now have a range of choices. You can read more about the difference between these choices, including cash funds vs term deposits, in our blog.

S&P Dow Jones Indices' 2023 mid-year SPIVA results are now out; showing that once again, over the long term, it’s incredibly hard to outperform the market, especially consistently over time. The vast majority of high-fee, actively managed funds have underperformed.

SPIVA is a research initiative assessing the performance of actively managed funds against a relevant benchmark, such as the S&P 500 index, across various asset classes and geographic regions.

As an investor, this tells you that your time is better spent on ensuring you have a few fundamentals in place, instead of picking stocks. Specifically:

• the right mix of growth assets for your needs or lifestage

• your assets are well-diversified

• costs remain low (by using index funds)

• your KiwiSaver balance is in the right type of fund and KiwiSaver provider relative to your needs and timeline, and;

• you have automated your investment habits where possible.

Trying to time the market, or building an investment portfolio of entirely direct stocks is likely to result in a worse outcome over time. The investor who simply owns the market (i.e. is well diversified) has an above-average chance of an above-average outcome.