Key market movements - December 2023

International share markets rebounded with a strong rally over the final three months of the year.

US inflation and economic growth rates both slowed further over the quarter, and Federal Reserve Chairman, Jerome Powell, indicated they were aware of the risk of keeping interest rates at restrictive levels for too long. This reinforced market expectations for potential US interest rate cuts in 2024.

More tellingly, this perceived shift in monetary policy direction from a ‘higher-for-longer’ stance to one of prospective interest rate cuts, resulted in the best quarterly performance of longer term global bonds in over two decades. It also supported an end of year rally in the US share market and renewed strength in share markets globally.

Sectors that are usually more sensitive to changes in interest rates, such as information technology, real estate and consumer discretionary companies generally led the way.

Although sharply lower prices for natural gas, crude oil, and gas oil contributed to lower inflationary pressures over the quarter, it also resulted in energy companies generally struggling to perform in an otherwise very positive market environment.

 

International shares

+9.4% (hedged to NZD)

+5.6% (unhedged)

US and Eurozone share markets delivered strong gains in the final quarter of the year.

Shares were supported by softer inflation figures in both regions, which raised hopes that interest rates may not only have peaked, but that rate cuts could become a reality sooner than previously expected.

Euro area annual inflation fell to 2.4% in November, when just a year previously it was recorded at 10.1%, while US consumer price inflation reduced to 3.1%. With economic growth also slowing in both regions, this data reinforced market expectations that the Federal Reserve (at least) has finished its rate hiking cycle and will move towards rate cuts in 2024.

Energy companies lagged the broader market as oil and gas prices moved sharply lower, while interest rate sensitive sectors such as information technology and real estate generally outperformed.

Responding to the same themes of slowing economic growth and moderating inflation, the UK share market also rose over the quarter, although not as impressively as the US or Eurozone markets.

Against most major currencies, the New Zealand dollar was a little stronger through the quarter which meant lower reported returns for investors holding unhedged foreign assets.

The MSCI World ex-Australia Index returned +9.4% for the quarter hedged to the New Zealand dollar and +5.6% for the unhedged index. This completed impressive full year returns for both indices of +23.2% and +24.5% respectively.

Source: MSCI World ex-Australia Index (net div.)

 

Emerging markets shares

+2.3%

Despite pressure early in the quarter, when rising bond yields and conflict in the Middle East weighed on emerging market returns, the quarter ended positively, although behind developed market shares.

Signs of a ‘soft landing’ for the US economy and increased expectations for interest rate cuts in 2024 were supportive. However, mixed economic data in China continued to suggest a lacklustre economic recovery from their Covid-induced slowdown. The ongoing Chinese real estate crisis also continued to weigh on sentiment. As the leading emerging markets constituent, the weak performance of China over the quarter acted as a drag on the broader emerging market performance.

Poland was the top individual performer over the quarter as markets welcomed Donald Tusk’s election as prime minister at the head of a pro-EU liberal coalition government, while Peru, Egypt and Mexico also posted strong double-digit returns. Brazil’s outperformance was driven by ongoing signs of slowing inflation and the Brazilian central bank’s resultant reduction in interest rates.

Taiwan was another notable performer, helped by strong returns from several technology-related stocks as the information technology sector globally outperformed.

While it was a solid quarter for the underlying emerging markets group, the stronger New Zealand dollar dampened some of those underlying gains. The MSCI Emerging Markets Index produced a quarterly return of +2.3% in unhedged New Zealand dollar terms, rounding out a +10.7% return for the full year

Source: MSCI Emerging Markets Index (gross div.)

 

New Zealand shares

+4.3%

The New Zealand share market, as measured by the S&P/NZX 50 Index, recovered most of last quarter’s weakness by delivering a +4.3% return from October to December. While several small companies outside the top 50 performed very strongly, more ‘index-relevant’ companies, on average, produced solid, if less spectacular, returns.

From within the top 50, Westpac, Auckland International Airport (AIA) and Fisher & Paykel Healthcare (F&P) led the way with quarterly returns ranging from 10.2% to 12.0%. Increased passenger numbers and a return to dividends provided a boost for AIA, while Westpac and F&P both announced improving profits.

While the news was positive for AIA it wasn’t mirrored by our flag carrier Air New Zealand which has seen its share price tending downwards since September as the company has grappled with supply constraints and capacity pressures. Air New Zealand shares declined by -13.0% over the quarter.

Ryman Healthcare was another notable firm to experience weakness in the fourth quarter. Ryman’s shares fell -6.5% following further write downs in the value of their investment properties, however the share price did stage a partial recovery in the last two weeks of December, as changing expectations about interest rates began to be seen as a positive for companies with exposure to property assets.

This fourth quarter gain of +4.3% helped the S&P/NZX 50 Index (gross with imputation credits) edge out of the negative and post a small gain of +3.5% for the calendar year.

Source: S&P/NZX 50 Index (gross with imputation credits)

 

Australian shares

+8.9%

The Australian share market (S&P/ASX 200 Total Return Index) registered a strong gain in the fourth quarter, rising +8.4% in Australian dollar terms.

While returns were generally quite evenly distributed across firms of different sizes, the notable exception was within the top 100 companies, where the largest 50 firms comfortably outperformed the next 50 firms. This was due in no small part to the five largest companies within the index - BHP, Rio Tinto, Commonwealth Bank of Australia, CSL Ltd and National Australia Bank - delivering quarterly returns of +13.9%, +19.5%, +11.8%, +14.3% and +8.5% respectively.

The reasons for these gains varied - BHP and Rio Tinto both benefited from a strong run up in iron ore prices over the quarter; bank lending margins generally improve when interest rates are rising (as they have been of late); and the share price of global biotechnology firm CSL ended on an upswing after a particularly volatile year.

In line with trends overseas, the energy sector was the clear laggard over the quarter given the backdrop of weaker international oil and gas prices. While a number of smaller Australian energy companies recorded good performances over the quarter, these performances were overshadowed by sector heavyweight Woodside Energy Group which delivered a -14.9% return.

While the return of the local Australian index was already impressive, the slightly stronger Australian dollar versus the New Zealand dollar over the quarter meant that reported returns to unhedged New Zealand investors increased a little further to +8.9%, taking the last 12 months return (also unhedged) to +13.0%.

Source: S&P/ASX 200 Index (total return)

 

International fixed interest

+3.0%

After a tough couple of years, the final quarter of the year was a very positive one for fixed income markets, resulting in their best quarterly performance in over two decades, according to the Bloomberg Global Aggregate indices.

The major driver of this performance was the perceived shift in monetary policy direction, away from a ‘higher-for-longer’ stance towards prospective rate cuts in 2024. This resulted in Government bond yields falling sharply, and the bond prices rising.

The US Federal Reserve kept interest rates unchanged throughout the quarter, with a much clearer shift to a more ‘dovish’ tone in December which accelerated the market rally. The revised dot plot – a chart showing the Federal Open Market Committee projections for the future federal funds rate – indicated that three rate cuts are now anticipated for 2024, up from the previously expected two.

Other major central banks also held rates steady, although they appeared more cautious about inflation. The European Central Bank made progress in its plan to unwind some of its Pandemic Emergency Purchase Programme support, while highlighting concerns about domestic inflation. However, the market has priced in several Eurozone rate cuts for next year. Meanwhile, the Bank of England’s Monetary Policy Committee remained divided on further tightening.

As markets priced in easing conditions, government bond yields fell across the board. The US 10 year bond yield retreated from 4.58% to 3.87%, with the two year bond yield moving from 5.05% to 4.25%, slightly reducing the degree of inversion in the US yield curve. Germany’s 10 year bond yield also fell from 2.84% to 2.03%, while the UK 10 year yield moved from 4.50% to 3.54%.

The FTSE World Government Bond Index 1-5 Years (hedged to NZD) returned +3.0% for the quarter, while the broader Bloomberg Global Aggregate Bond Index (hedged to NZD) gained +5.7% due largely to the longer average duration of this index. Over the year, these indices returned +5.0% and +6.6% respectively.

Source: FTSE World Government Bond Index 1-5 Years (hedged to NZD)

 

New Zealand fixed interest

+5.0%

The Reserve Bank of New Zealand (RBNZ) surprised many with a ‘hawkish hold’ at its November Monetary Policy Statement meeting. In other words, while they did not announce an actual increase in interest rates, they signalled they were ready to increase them if inflation re-emerged.

What they did do was lift their Official Cash Rate (OCR) path to imply an 80% chance of a 0.25% interest rate hike next year. They also eliminated their prior forecast recession for the second half of 2023, reduced their unemployment rate forecast, and added to expectations of further house price gains. This is all despite almost all the economic data in recent months suggesting that monetary policy is working.

What appears to have changed at the RBNZ is –

1. they are more concerned about high rates of net migration being inflationary (despite most evidence so far suggesting the opposite).
2. their tolerance for inflation persisting above the 1% to 3% band has reduced.
3. they are not happy with the market’s anticipation of interest rate cuts next year and are looking to ward off any overconfidence that future interest rate cuts are fait accompli.

In spite of this, the longer term New Zealand government bond yields followed the international equivalents and fell significantly during the quarter, with the New Zealand 10 year bond yield declining from 5.34% to 4.39%.

The S&P/NZX A-Grade Corporate Bond Index gained +5.0% for the quarter, while the longer duration but higher quality S&P/NZX NZ Government Bond Index gained +7.3%. These strong results helped both indices post very respectable full year returns of +7.4% and +5.4% respectively in 2023.

Source: S&P/NZX A-Grade Corporate Bond Index

 

 

Table 1: Asset class returns to 31 December 2023

Asset class	Index name	3 months	1 year	3 years	5 years	10 years
International shares	MSCI World ex Australia Index (net div., hedged to NZD)	+9.4%	+23.2%	+7.9%	+12.2%	+10.0%
	MSCI World ex Australia Index (net div.)	+5.6%	+24.5%	+12.0%	+14.2%	+11.6%
Emerging markets shares	MSCI Emerging Markets Index (gross div.)	+2.3%	+10.7%	-0.5%	+5.3%	+5.8%
New Zealand shares	S&P/NZX 50 Index (gross with imputation credits)	+4.3%	+3.5%	-2.7%	+6.8%	+10.6%
Australian shares	S&P/ASX 200 Index (total return)	+8.9%	+13.0%	+9.5%	+10.9%	+7.9%
International fixed interest	FTSE World Government Bond Index 1-5 Years (hedged to NZD)	+3.0%	+5.0%	-0.2%	+1.1%	+2.3%
	Bloomberg Global Aggregate Bond Index (hedged to NZD)	+5.7%	+6.6%	-2.4%	+1.0%	+3.2%
New Zealand fixed interest	S&P/NZX A-Grade Corporate Bond Index	+5.0%	+7.4%	-0.8%	+1.6%	+3.5%
New Zealand cash	New Zealand One-Month Bank Bill Yields Index	+1.4%	+5.5%	+2.8%	+2.1%	+2.3%

Unless otherwise specified, all returns are expressed in NZD. We assume Australian shares and emerging markets shares are invested on an unhedged basis, and therefore returns from these asset classes are susceptible to movement in the value of the NZD. Index returns are before all costs and tax. Returns are annualised for time periods greater than one year.

 

 

For a detailed review of the market commentary for the quarter, see ‘Market commentary - December 2023'

 

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While every care has been taken in the preparation of this newsletter, Consilium makes no representation or warranty as to the accuracy or completeness of the information contained in it and does not accept any liability for reliance on it. Information contained in this newsletter does not constitute personalised financial advice and does not take into account your individual circumstances or objectives.