Investment Update

It was another good quarter for US share markets with several indices trading to new record highs, while European markets were also higher across the board. Against the backdrop of another strong period for equities, the MSCI All Country World Index rose 4.5% over the quarter.

Meanwhile, global bonds were also stronger, as interest rate cuts from several central banks supported bond prices. The Bloomberg Barclays Global Aggregate Total Return Index (100% hedged to NZD) returned 4.22% over the quarter.

The Fed cut the fed funds rates by 50 basis points in September, kicking off its interest rate easing cycle by a larger-than-expected cut. The central bank said it was confident inflation was on the right path and said its focus had shifted to the slowing labour market.

“The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate”, the Fed said.

The Fed’s increasing focus on the labour market came after a couple of weaker than expected employment reports and a jump in the unemployment rate to 4.3% in July, its highest level in nearly three years.

Meanwhile, adding to concerns about the US labour market was news the economy created 818,000 fewer jobs than originally reported in the 12-month period to 31 March 2024. It was the largest downward revision since 2009.

The trials and tribulations of the US election continued during the quarter, beginning with the news that President Joe Biden was stepping out of the race and Vice President Kamala Harris accepting the party’s nomination.

The turbulence continued with two assassination attempts on former President Donald Trump, while a fiery debate between the two ended in a victory for Harris. The strong showing saw Harris move ahead of Trump in most national polling. 

With about a month left on the campaign trail, both parties were making their final pitch in key battleground states in the Mid-West and across the Sunbelt.

The Reserve Bank of New Zealand (RBNZ) cut the Official Cash Rate (OCR) by 25 basis points in August, its first cut since the pandemic emergency cut in 2020. The cut came as economic data showed the local economy continues to struggle. 

Weak economic data included a 1.2% decline in Q2 retail sales – the ninth quarterly decline over the past 10 quarters, while the unemployment rate rose to 4.6%, the highest level in more than three years. Meanwhile, the economy contracted by 0.2% in the three months to June 2024. Primary industries continued to weaken, with mining dropping 3.7% and the agriculture, forestry and fishing sectors down 1.4%.

By the end of the quarter, interest rate markets were pricing in more than 200 basis points of cuts over the coming 12 months.

International equity markets rose over the quarter, helped in part by interest rate cuts from many of the world’s largest central banks. 

In the US, the S&P 500 rose 5.9%, while the NASDAQ 100 was up 2.8%. Both reached record highs during the quarter. At a sector level, interest rate cuts saw the real estate sector perform well, while at the other end of the spectrum, energy was the one sector to deliver a negative return, held back by a drop in oil prices. 

Across in Europe, share markets also rose, but mostly underperformed US markets with the Euro Stoxx 50 rising 2.4% over the quarter, while the FTSE 100 ended up 0.9%. Concerns around elevated services inflation in the UK tempered investor sentiment.

Meanwhile, Asian markets made a strong comeback late in the quarter after the People’s Bank of China (PBOC) announced a stimulus package to help alleviate deflationary concerns and shore up the flailing property market. The package included interest rate cuts and a reduction in the reserve requirement ratio (RRR) – the amount of cash banks must hold as reserves – that should free up about 1 trillion yuan for lending. 

After a sell-off in August and early September, the Shanghai Composite rallied late to close, up 14.3%, while the Hang Seng gained more than 17%. Meanwhile, Japan’s Nikkei 225 ended the quarter down 3.5%, struggling against the backdrop of a strengthening Japanese yen. 

New Zealand equities, as measured by the NZX 50, bounced back from a challenging second quarter to finish the third quarter up 6%. 

At a company level, Arvida Group (+79.6%) was the best performer, following a $1.3bn takeover offer by a US private equity firm. The whole retirement sector benefited, with Oceania Healthcare, Ryman Healthcare and Summerset Group all delivering double-digit returns. In contrast, Spark NZ (-27.2%) underperformed after it reported a 72% drop in net profit from $1.1 billion to $316 million. The company also announced it would cut about 10% from its labour costs. 

In Australia, the ASX 200 rose 7.8%, hitting a new record high. Despite weakness in commodity prices – notably oil and iron ore – Australian shares saw strong gains in the financials and technology sector. 

Helping lift the index to a fresh high, was strong showings from the ‘Big Four’ banks, which all delivered positive returns over the quarter. 

Global government bond markets delivered strong gains over the quarter as most developed central banks cut interest rates as inflation rates were trending towards target rates. 

US bonds were some of the better performing after the Fed’s 50 basis point cut, while further progress on inflation also improved the outlook for bond prices. Over the quarter, the yield on the US 10-year government bond fell 62 basis points to 3.78%. 

In Europe, bonds also rose after the European Central Bank (ECB) followed up its June interest rate cut with a second 25 basis point cut. Meanwhile, UK bonds also delivered gains, but returns were behind their global peers amid concerns about stubbornly high services inflation. 

It was a good quarter for domestic bond holders, helped in part by the 25 basis point cut in the OCR by the RBNZ. The move came just a few months after the central bank delivered a surprising hawkish statement where it lifted the probability of an interest rate hike. 

The about-turn came as economic data continued to worsen, highlighting challenges the domestic economy is facing. Meanwhile, bonds found further support after news annual inflation fell to 3.3% during the second quarter, the slowest pace in three years.

Over the quarter, the yield on the New Zealand 10-year government bond fell 43 basis points, closing at 4.2%.

New Zealand listed property had a strong quarter, rising 8.6%, outperforming the broader NZX 50. Listed property tends to perform well when bond yields fall, as was the case this quarter. Meanwhile, listed infrastructure stocks had a stellar quarter, with the FTSE Global Core Infrastructure 50/50 Net Index (100% hedged to NZD) delivering a 12% return.

Global asset prices rose across the board during the quarter as central bank cuts helped bond prices, while the prospect of a soft landing in the US saw equities push to record highs. 

As we assess the outlook for the global economy, the key themes we are following include:

At its September meeting, the Fed made it clear that the labour market is becoming more and more important as it sets monetary policy over the coming months and into 2025. 

Historically, the labour market has been the last piece in a market-cycle framework to roll over, and recent economic data suggests that it may be starting to weaken – making it the greatest risk to our base case. Notably, we have seen a few downside surprises in nonfarm payrolls, while the unemployment rate is at 4.2%, up from 3.7% at the start of the year.

The New Zealand economy continues to underperform many of its global peers with retail spending tepid, growth contracting and the unemployment rate rising. 

With inflation showing signs of heading back towards the RBNZ’s target, we can expect more interest rate cuts ahead. In saying this, the market is pricing in far more cuts than the RBNZ forecasted at its August meeting, which leaves bond prices susceptible to a sell-off (bond yields rising) should any economic data surprise to the topside. 

Inflation slows as services and shelter inflation eases; growth remains resilient and central banks are confident enough to ease policy to ensure that real rates remain steady rather than rise as inflation falls. As a result, global markets avoid a recession as a longer expansion is priced.