Navigating the storm
Periods of sharp market disruption have become a recurring feature of the investment landscape in recent years — last month was no exception. US strikes on Iran and the subsequent closure of the Straits of Hormuz initiated an energy crisis that is propagating through economies and share markets around the world. Cautious positioning in our Funds cushioned falls, but with asset markets falling heavily last month, Milford Funds of all types fell. One-year returns continue to be broadly positive.
Markets initially treated this shock as an inflation problem, with fears of weaker economic growth only emerging later in the month. Oil prices rallying over 60% in the month ignited fears central banks would raise interest rates again. This sent global bonds sharply lower, registering their worst month in three3 years. Weakness was concentrated in shorter maturity bonds, instruments that are typically less volatile. Having repriced lower, we now see greater value in shorter term bonds and have increased our exposure, largely in NZ bonds, as we do not expect significant interest rate hikes going forward.
Falls in share markets were indiscriminate. Global shares were down close to 10% whilst Australian and NZ shares both fell over 5%. The broad selling resulted from investors questioning the previously optimistic global outlook and readjusting portfolios accordingly. This saw previously strong performers such as European and UK shares sold heavily, whilst more defensive shares were also weaker on the back of the move higher in global bond yields. Milford Funds were broadly underweight shares and held a more defensive mix with fewer growth stocks. Consistent with our more positive view on bonds, we think a tilt to a more defensive mix of shares offers good risk– reward no matter the geopolitical outcomes.
On the positive side, our larger US dollar position helped offset weaker global assets, as the NZ dollar fell over 4% last month.
We believe there is a reasonable prospect of a near-term resolution. We are also very aware of the range of risks associated with a more protracted conflict. Falls in asset prices reflect some of these risks and offer good investment opportunities, compared to the broadly expensive investment universe we had been flagging two months ago. In a rapidly evolving situation, we continue to be dynamic in responding to the developments and adjusting our positions accordingly, across shares, bonds and currencies.
