Market review

Equity markets had a good start to the year, with many global share markets reaching record highs. However, bonds did not perform as well, with bond yields rising in most global markets.

Global share markets rose over the first quarter, helped in part by the ongoing optimism around artificial intelligence (AI). Against this backdrop, the MSCI All Country World Index rose 9.1% over the quarter, in local currency terms.

In the US, the S&P 500 rose 10.6%, while the NASDAQ 100 was up 9.3% – both reached record highs. 

European share markets also saw good gains buoyed by a slowing rate of inflation, while Japan’s Nikkei 225 remained one of the strongest share markets of late, rising more than 20% over the quarter as the local economy continues its revitalisation after a period of stagnant growth. 

The key theme over the first quarter was central banks, and their decisions on interest rates. 

In the US, the Federal Reserve (the Fed) left interest rates unchanged, and its members reaffirmed their expectation that there would be three interest rate cuts by the end of the year. It was a similar story in Europe, with the European Central Bank (ECB) also leaving interest rates unchanged and signalling that it would likely cut interest rates sometime later this year. 

There were some outliers though: The Bank of Japan (BoJ) raised interest rates by 10 basis points, becoming the last country in the world to end a policy of negative interest rates, while, the Swiss National Bank (SNB) cut interest rates, saying it’s confident inflation there would return to target.

New Zealand equities finished the quarter modestly higher, with the NZX 50 up 2.8%, which moved the market into positive territory over the past 12 months. However, its return lagged behind those of its global counterparts.

There were some key economic indicators over the quarter that generally pointed to a slowing of the domestic economy amid inflation worries. 

Inflation data showed that consumer prices rose at an annual pace of 4.7% in the fourth quarter of 2023. While it was the smallest annual rise in over two years, non-tradeable inflation (domestically generated) remained worryingly high, at 5.9%.

Also on the weak side were retail sales figures, which fell 1.9% during the final quarter of last year. It’s the eighth consecutive fall for this data series and highlights the ongoing challenges households are facing from high borrowing costs.

Perhaps the biggest news however was confirmation that the New Zealand economy entered a recession in the final quarter of 2023, contracting 0.1% over the three months ending December 2023, and marking the second consecutive quarter of negative economic growth.

Given these headwinds, the Reserve Bank of New Zealand (RBNZ) left the Official Cash Rate (OCR) unchanged at 5.50%. It also lowered the rate it expected the OCR to peak, implying a less-likely chance of further interest rate hikes.