Mark Lister: First quarter of 2021 wraps up

KiwiSavers with their money in growth funds will have performed best so far this year. Photo / Getty Images

The first quarter of the year wrapped up last week, and it was a lucrative one for most investors and KiwiSavers. The world economy continued to improve from the ravages of the Covid-19 pandemic and global sharemarkets pushed higher in response.

Having been down 33.7 per cent at one point last year, by the end of last month the MSCI All Country World Index had rebounded 79.2 per cent from its 2020 lows. That saw it finish the March 2021 quarter 18.8 per cent above pre-pandemic levels, having hit a new record in February.

Most international sharemarkets were up strongly during the first three months of 2021, with European and Japanese shares the best performers. However, when moves in the NZ dollar were accounted for, the strongest regions for local investors were the UK and US, which rallied close to 10 per cent.

The NZ dollar strengthened against the euro and the Japanese yen, but declined against the US dollar, the Australian dollar and the British pound.

Compared with pre-pandemic levels (at the beginning of 2020) the currency is 3.6 per cent higher against the US dollar, 4.2 per cent lower against the Australian dollar, and little changed against the euro and British pound.

In contrast to international markets, the March quarter saw domestic shares lag, with the NZX 50 and the listed property sector falling 4.1 and 4.2 per cent respectively. This was primarily due to increases in longer-term interest rates during the first three months of 2021.

The five-year swap rate finished March at 1.12 per cent, still very low by historical standards but a big step up from 0.54 per cent three months earlier.

This has taken the shine off defensive, dividend-paying shares (which dominate the local market) and caused investors to refocus on companies more exposed to a strengthening economy.

For similar reasons, fixed income and bond returns were slightly negative during the March quarter (prices for fixed interest securities move inversely to yields).

As a consequence, KiwiSavers with their money in growth funds will have performed best so far this year.

Mark Lister is Head of private wealth research at Craigs Investment Partners. Photo / Supplied

Most growth funds are invested predominantly in shares, rather than fixed income and bonds, and they also tend to favour international shares rather than local ones.

Conservative funds will have lagged, and some might have even experienced a modest negative return. These are typically invested in bonds and fixed income, with only a small allocation to shares.

Looking ahead, financial markets are in good spirits as we enter the second quarter of 2021, so we are likely to see similar trends prevail over the next few months.

The global economy is gaining momentum as the vaccine rollout drives a gradual easing of restrictions.

The US economy, in particular, is looking very strong. With California (the biggest state by population) targeting a mid-June reopening, we should see a big uplift in activity as "business as usual" resumes in America.

Central banks are firmly on the sidelines, so don't expect any movement in the Official Cash Rate this quarter, or even this year. However, inflationary pressures are upon us so longer-term interest rates could keep rising.

For new investors, it is important to remain disciplined and take a staggered approach to investing. It's been full steam ahead for financial markets since the middle of last year, but there are risks and uncertainties lurking beneath the surface.

At the same time, don't be too restrained or unwilling to take on any risk at all. If you are looking to generate a reasonable return on your capital, beat inflation and grow your long-term wealth, sitting on the sidelines can be just as risky as being in boots and all.

Mark Lister is head of private wealth research at Craigs Investment Partners. This column is general in nature and should not be regarded as financial advice.