Ukraine invasion heightens already elevated volatility

Key points

• The MSCI All Country World (global shares) Index rose +2.4% in NZD hedged terms in March and, with the New Zealand dollar strengthening in the past month, the same Index fell -0.6% in NZD terms over the month.
• The New Zealand equity market (S&P/NZX 50 Gross with imputation) finished the month up 1.1%, whilst the Australian equity market (S&P ASX 200) rose 6.9% in AUD terms and 7.6% in NZD terms.
• Prompted by shifts towards faster rate hikes from offshore central banks and combined with large mortgage-based hedging flows domestically, market interest rates pushed relentlessly higher through the month, with the New Zealand 10-year Government bond yield ending at 3.2%, an increase of 0.5%.
• Potential easing of the conflict in Europe and a clearer path for US Federal Reserve (Fed) interest rate increases saw equity markets recover through March; while production disruption and Russian sanction constraints contributed to an increase in commodity prices with the price of oil increasing another 7% over the month.

Key developments
Global equity markets were mixed over the month with the US, Australia and New Zealand providing positive returns offset by European and Asian markets drifting lower. A further sharp lift in long term interest rates, clarity from the US Fed and oscillating geopolitical tensions contributed to volatility over the month.

Stock market sectors that are more sensitive to higher long-term government bond yields and interest rates more generally (especially fast growth technology stocks) were weak over the March quarter as investors anticipated the need for higher rates to offset inflation. During the March month though, prices of quality growth stocks recovered even as US 10-year bond yields rose +0.5% to 2.3% (New Zealand bond yields were up +0.5% to 3.2% and Australia up +0.7% to 2.8%). The key reason for the rally may have been that weakness in growth stocks early in the quarter captured a large degree of potential bond yield increases, and the likely economic slowdown due to policy change may make growth stocks’ underlying cycle-independent growth look relatively more attractive.

In Australia, energy and resource stocks continued to deliver strong returns reflecting tight supply demand dynamics. Bank stocks performed relatively well as investors allowed for earnings upgrade potential with higher interest rates lifting net margin income. In New Zealand, relaxation of international travel quarantine and isolation requirements provided a lift to the travel and tourism sector.