In the USA, the flagship S&P 500 Index (total returns in USD) was in line with the broad market, gaining +0.6% for the quarter. Strong company earnings supported the index through July and August, but growth and inflation concerns late in the quarter saw US shares retrace their steps in September. European markets followed a similar pattern, with weakness later in the period due to rising energy prices and concerns that supply-chain bottlenecks would drive inflation higher.
Emerging markets shares
Emerging market equities struggled in the third quarter which saw a sell-off in Chinese shares, concerns over continued supply chain disruptions, and worries over the implications of higher food and energy prices in some markets. Regulatory actions in China were the initial trigger for market weakness. These were compounded by the re-imposition of some Covid-19 restrictions, power shortages, and worries about possible systemic financial system risks stemming from the potential collapse of Chinese property developer Evergrande.
New Zealand shares
New Zealand was one of the better performing global developed share markets through the quarter with the S&P/NXZ 50 Index returning +5.2%. With underlying economic conditions still broadly favourable and the market ‘looking through’ the ongoing Covid uncertainties, it was generally the larger companies within the index which performed better than the smaller capitalisation firms. The most significant contributions came from firms in the Healthcare and Industrials sectors.
In spite of a September sell-off, the Australian share market also returned a positive quarter in local currency terms, with the S&P/ASX 200 Index (total return) in Australian dollars gaining 1.7%. In direct contrast to the New Zealand market, the largest capitalisation firms generally struggled over the quarter, while good returns were delivered by the mid and small capitalisation end of the market.
International fixed interest
While the US 10-year Treasury Bond yield finished the quarter at 1.49%, only one basis point higher than it closed in June, it was the pathway to get there that interested markets. Yields fell initially, as the rapid economic recovery appeared to be moderating. However, as the market's focus turned to rising inflation and the prospect of the withdrawal of monetary policy support, yields rose back to the levels seen at the start of the quarter. The Federal Reserve also recalibrated expectations regarding their ongoing asset purchase programme, suggesting they could commence a tapering of asset purchases as early as November 2021 and completed by mid-2022, earlier than originally expected.
New Zealand fixed interest
At its 18 August 2021 meeting, the Reserve Bank of New Zealand (RBNZ) once again elected to leave the official cash rate at 0.25% however, it was only the recent return to Level 4 lockdown that deferred the anticipated increase in interest rates. The Monetary Policy Committee advised this was only a delay due to the sudden increase in health uncertainties, not a change in their planned approach. This was subsequently verified on 6 October when they announced an increase in New Zealand’s official cash rate from 0.25% to 0.50%.