MARKET FLASH: (a big week for financial markets)

Graham Ansell, Head of Investment Management at ANZ Investments, looks back at an important week for financial markets and discusses what it means for members of ANZ Investments’ three KiwiSaver schemes.

What’s happened?

The week ending 15 December was a busy week for the world’s central banks, where a number of their decision-making committees met to discuss and set interest rate policy for their economies. Among the key ones were the US Federal Reserve (Fed), the Bank of England, the European Central Bank (which sets interest rates across the eurozone), the Bank of Switzerland and the Bank of Norway. Collectively, these five central banks set borrowing costs for more than a third of the global economy.

With global growth growing steadily and some early signs of inflationary pressures (higher prices), we expect interest rates to move higher from here.

Why are interest rates so important?

Put simply, they determine the level at which consumers and households can borrow money. Higher interest rates push up home loan rates and can have a flow-on effect on the housing market and retail sales. They also impact on businesses. As it becomes more expensive to borrow money, businesses may put-off buying new machinery or investing in new capital that’s required to help them to grow. This can slow economic progress.

So, was it all doom and gloom?

No, in the end, only the Fed moved interest rates higher, with the others leaving theirs on hold. The Fed raised rates by a quarter per cent, to a target range of 1.25% to 1.50%.

Along with other central banks, the Fed is trying to strike a balance between some growth and too much growth. Moving interest rates too high, too quickly may stall an economic recovery. Moving too little, too late may let an economy get ahead of itself, meaning a greater chance of a more abrupt slowdown down the track.

How did markets react?

Throughout the year, the Fed has talked about a gradual approach to moving interest rates higher and this explains why markets took its latest move in their stride. We should also remember that US interest rates are at exceptionally low levels by historical standards:

Fed Funds Target Range (1)

What does it mean for investors going into 2018?

Rising interest rates herald both challenges and opportunities for investors. With interest rates on the up, investments that pay a fixed rate of interest, such as government bonds, may become less attractive to investors. That means potentially more challenging times ahead for bonds investors.

Meanwhile, if the global economy stays strong, which we expect given signs of more synchronised global growth, then share investments should continue to do well.

What does this mean for the investments in your KiwiSaver account?

Markets have always moved in cycles, and so have interest rates. Expectations of a more divergent performance from different types of investments, such as bonds and shares, reinforces the importance of diversifying your investments.

While diversification cannot guarantee you against investment losses, holding an appropriately diversified mix of assets can help you navigate changing market conditions and achieve your long-term financial goals. All of the funds across ANZ Investments’ three KiwiSaver schemes are well-diversified and higher interest rates are just one of many factors we take into account when setting investment strategy.

Published December 2017

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