NZDF Investment Insights Q2 2022 - from Mercer

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welcome to this edition of investment
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insights today we have hayden tyrell
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with us welcome hayden thanks laura
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the russia ukraine crisis has been
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ongoing for a while now with sanctions
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being put on russia from countries
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across the world how has this impacted
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markets both worldwide and in new
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zealand two key themes are driving
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markets at the moment these are
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inflation and a conflict between ukraine
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and russia the conflict came at a time
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when global share markets were already
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showing increased levels of volatility
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this was off the back of signals from
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central banks around the world that they
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would start to wrap up their support of
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monetary policy regimes in response to
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soaring inflation
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this shook global share markets as a key
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asset in the tool belt of a central bank
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is to raise interest rates we've seen
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this happen in new zealand recently with
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the reserve bank in new zealand raising
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interest rates and these increases
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feeding through to the likes of mortgage
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rates
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this hits businesses the same way that
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it hits households resulting in
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increased loan expenses lower profits
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and a lower share price the conflict
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only added to the volatility as
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investors questioned the severity and
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also the ripple effect it would have on
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many industries and regions
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as a result we saw global share markets
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continue to sell off and investors move
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their money to traditional safe haven
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assets such as treasury bonds and gold
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we also saw commodity assets such as oil
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and wheat have large price fluctuations
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as the conflict's impact on supply of
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these assets was questioned
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war on conflict creates instability
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which we have seen with the migrant
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crisis and financial markets with the
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duration of the conflict unknown do we
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think there will be continual market
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instability going forward
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whilst the war continues and questions
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remain around how it can impact markets
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we will see increased levels of market
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volatility
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in saying that we saw a board-based
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recovery in equity markets across march
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and the vix index which is a measure of
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volatility in the s p 500 has retreated
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indicating less expected volatility in
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the markets the shock of the conflict
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has at this time being priced into
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markets however it will not take much to
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change this if a further escalation
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occurs or the war spills over into a
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neighboring nato country flash flooding
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recently seen across the pacific is
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becoming more frequent with climate
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change cities are learning to adapt how
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are the portfolios adapting to climate
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change
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sustainability is one of mercer's core
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investment beliefs
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last year most new zealand committed
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ourselves to achieving net zero carbon
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emissions from all of our investments by
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2050 with a 45 reduction by 2030. this
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means that we're actively working
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towards a lower carbon future through
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collaborating closely with our
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investment managers to reduce portfolio
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carbon emissions and avoid companies
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that will be adversely affected by
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climate change instead investing in
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solutions that aid the transition like
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renewable energy and digital technology
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inflation numbers in new zealand and
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around the world are at historical highs
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this tends to provide headwinds for
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financial assets how are the portfolios
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set up to deal with inflation that's
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right laura inflation in new zealand was
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5.9 over the past year we've seen
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similar levels globally
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we expect it to remain elevated over the
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short term and then trend back down to
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more normal levels in the medium to long
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term
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our portfolios are stress tested
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regularly for a range of different
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scenarios including higher inflation
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this helps us understand how they would
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behave in that environment a diversified
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approach means we have allocations to
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inflation-sensitive assets such as
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listed and unlisted infrastructure and
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property that should help smooth returns
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in a higher inflationary environment
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