Can the local sharemarket continue to outperform?

Once again the New Zealand sharemarket performed strongly, with the NZSX50 Index up 3.1% for the month and 24.3% for the year. After starting the month well, global equity markets retreated and finished with a return of 1.3% for September, with a 14.2% return for the year (MSCI in local currency terms). The strong kiwi dollar completely eroded this twelve month return for unhedged investors.

The reverse is true with bonds. The local market has consistently under performed the global bond market and this trend continued in September. The local market returned 0.7% for the month (NZX Government Bond Index) and 4.2% for the year. Global bonds (Lehman Global Aggregate Index) returned 0.8% for the month and 7.7% for the year.

But this is the past – what of the future?

A key issue to answering this, as always, remains the interest rate outlook. The domestic bond market has struggled to cope with five interest rate rises by the Reserve Bank so far this year. However, there is a growing feeling that the tightening cycle may be nearing its end, with probably only one more rate rise to come.

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