The US share market has bounced strongly after the global financial crises and is now 100% above its lows.  The US market benefited as the risk of a collapse of the financial market system was averted and due to very low interest rates.  Low interest rates reduce the financing costs for companies, gives consumers more spending power and make shares look attractive relative to fixed interest investments.  US companies have also been very good at restructuring and driving profit margins higher despite a relatively weak economic environment.  

Over the longer-term however, the US S&P500 index has only recovered to where it was thirteen years ago – showing the downside of a passive buy and hold strategy.The weakest major market over the last three years has been China showing that high levels of economic growth do not necessarily equal good share market returns.

Country Return
New Zealand 21.50%
Australia 16.80%
United States 37.70%
Germany 29.80%
Japan -10.60%
China -28.50%
UK 20.80%

Looking forward the valuation of shares remains attractive relative to very low interest rates which provides strong support, as does moves by global policy makers to help boost growth and employment.  A key will be whether the policy makers can be successful in the medium-term in helping to restore growth or will the overhang of debt from the previous decades dominate.  A key factor in the short-term is investor confidence and their willingness to take on risk.  On balance we believe shares are reasonably placed to generate moderate returns over the medium-term.   However, forecasting with any confidence is difficult which makes a passive strategy of buying and holding shares a risky one.

Jonathan Windust

Portfolio Manager