Market commentary: Aug 2024
Investment performance
The big news in markets is the US Federal Reserve announcement that “the time has come” to lower interest rates. The US share market jumped 1.2% on the announcement. In NZ the Reserve Bank cut the OCR from 5.50% to 5.25% and overall share prices on the NZ market increased by 2.2%. Lower interest rates are good for investment returns. Net returns across our client portfolios range from 4-5% for the last 6 months and 8-9% for the year to 31 August. The main driver of returns continues to be international shares and investor excitement around companies involved in the development of artificial intelligence.
Interest topic: Property is out, and infrastructure is in
Why not property?
The aim of investing in different asset classes is diversification to improve returns relative to volatility. Property was seen as having more stable cash flows and a stronger link of cash flows to inflation compared to shares.
However, Makao Investments (our research consultant) found that this hasn’t been the case and global property hasn’t provided additional diversification as expected. This was particularly evident during the GFC in 2008 and the recent period of high inflation when property demonstrated high correlation with share markets – both falling in value.
On their recommendation, we have sold property investments and increased investment in infrastructure. This is a big change so we thought it would be good to explain our decision.
Why infrastructure?
The main reason for the focus on infrastructure investments is improved diversification for our client portfolios and therefore smoother overall returns.
What’s included in infrastructure?
Regulated utilities like energy and water. Transport infrastructure companies like airports, ports, railroads, cell phone tower networks, oil and gas pipelines.
What makes infrastructure companies different?
They provide essential services while facing limited competition. Infrastructure companies can adjust prices with limited impact on demand. As a consequence, earnings are more reliable than those of a typical industrial company and generally enjoy inherent protection against inflation.
Responsible investing
Infrastructure companies are set to benefit from the movement to carbon zero as governments regulate and public demand for sustainability grows. The infrastructure funds in your portfolio invest with this in mind and seek to invest in companies that are actively reducing their carbon footprint. All in all, this is positive for investment returns and it’s good to know that these companies are contributing to sustainable development.
Richard Grimes, CERTIFIED FINANCIAL PLANNER (CFPCM), Director and Financial Adviser