Market and Portfolio Update October 2022

Market Update

October provided a much needed reprieve for global share markets, rising 7.2% (in local currency terms). The month saw a number of companies report their latest earnings numbers, which at a broad level, were better than expected.

The NZ share market ended the month up 2.5%. Performance of the listed travel-related companies was particularly strong, with Tourism Holdings and Auckland International Airport up 32% and 7%, respectively. During the month, both companies upgraded their profit guidance due to increased certainty on revenues and tourism numbers.

The latest data shows New Zealand’s annual inflation rate to the end of September was 7.2%. This was a slight moderation from 7.3% in June but remains well above the RBNZ’s 1-3% target. Market expectations are now for the RBNZ to progressively raise the OCR to around 5% by May next year (currently 3.5%).

Is there a silver lining to a lower New Zealand dollar?

2022 has so far been a unique year for investors. High inflation, geopolitical tensions, and rising interest rates have resulted in some volatility in financial markets. However, it is important to remember that volatility is a natural part of economic cycles, and markets recover over time. Because volatility is part and parcel of investing, we build Booster portfolios with this in mind. We include a number of ‘shock absorbers’ in portfolios to support returns during periods of market volatility.

Using the New Zealand dollar as a ‘shock absorber’

An example of a ‘shock absorber’ we include in Booster portfolios is intentionally leaving a portion of the overseas investments ‘unhedged’, meaning their value moves freely with changes in the New Zealand dollar.

During periods of significant market volatility, the New Zealand dollar typically falls, supporting the returns of unhedged overseas investments for New Zealand-based investors. This relationship has played out as expected during the market volatility over the last year, with the New Zealand dollar falling against many currencies but most significantly falling 18% against the US dollar.

The chart above illustrates the benefit of leaving a portion of the overseas investments in Booster portfolios unhedged. Over the last year, the falling New Zealand dollar has resulted in unhedged global shares performing 16% better than if the foreign currency exposures were locked in.

Where to from here?

Although leaving a portion of overseas investments unhedged often benefits portfolios during volatile periods, we look for opportunities to change how much is left unhedged. A silver lining of volatile periods is that they can create opportunities like these.
The chart to the right shows how much the New Zealand dollar has moved relative to the US dollar this year, and how that compares to history. We are closely monitoring the situation for the right time to increase hedging on overseas investments and provide protection against a rising New Zealand dollar.
When building portfolios, it is important to include components that help cushion against market volatility, such as leaving a portion of the overseas investment unhedged. Combined with actively capturing opportunities to add value (and mitigate risks), it should lead to a smoother path for investors to reach their financial goals.

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