Key market movements - June 2023

Central banks maintained their laser-like focus on combatting inflation by continuing to raise interest rates globally during the quarter.

With the Eurozone and New Zealand economies already in a mild recession and other regions facing a lower growth outlook, at least in the near term, share markets were not burdened by high expectations.

However, with plenty of bad news having already been factored into share prices last year, it was pleasing to see international developed share markets still perform strongly over the quarter. Leading the way were a number of mega-cap US technology firms identified as potential beneficiaries of any greater movement towards increased utilisation of artificial intelligence.

Although share market returns across Australasia and the emerging markets were less significant, these regions also contributed positively to investor returns during the quarter.

With global interest rates moving higher again, in particular in the UK and Australia where inflation pressures were proving a little harder to dampen, the overall returns from global bonds were fairly flat.

When the US Federal Reserve announced they were pausing their interest rate hiking programme in June, it provided a tangible and important sign, to end the quarter, that the global fight against inflation was making positive progress.

 

International shares

+7.5% (hedged to NZD)

+9.0% (unhedged)

US and Eurozone share markets made good gains in the second quarter, with the bulk of these gains coming in June.

Information technology companies benefitted from investor excitement about the future applications for artificial intelligence and a number of technology and semi-conductor companies saw their prices appreciate strongly.

Although both regions raised interest rates during the quarter, the greater resilience of the US economy encouraged the Federal Reserve to pause their hiking programme in June - an encouraging sign for equity markets.

The UK share market was weaker over the quarter. Higher than expected core inflation data resulting from strong job and wage growth figures suggested the Bank of England still had work to do to get on top of inflation on a sustainable basis. This led to a reacceleration in interest rate hikes for the UK which presented a clear headwind for the domestic UK share market.

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

The MSCI World ex-Australia Index delivered a healthy return of +7.5% for the quarter hedged to the NZ dollar, and +9.0% for the unhedged index.

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

 

Emerging markets shares

+2.9%

Emerging markets posted a small positive return over the second quarter, rising +1.0% in US dollar terms.

The Chinese share market was a major contributor to the lower returns. The anticipated economic rebound following China’s reopening after the Covid-19 crisis began to falter, driving Chinese shares sharply lower.

Hungary, Poland and Greece were the top performing emerging markets in USD terms despite rising recessionary fears in Europe. Brazil was also a top performer as growing optimism about potential interest rate cuts and better than expected first quarter growth figures, led to strong gains in Brazil’s Bovespa Index.

Indian shares also performed well, driven by foreign inflows and steady earnings, as encouraging economic data boosted sentiment towards the country.

In spite of China’s weakness, the emerging markets group contributed positively, and the slightly weaker New Zealand dollar over the quarter meant the MSCI Emerging Markets Index produced a quarterly return of +2.9% in unhedged New Zealand dollar terms.

Source: MSCI Emerging Markets Index (gross div.)

 

New Zealand shares

+0.4%

The New Zealand share market, as measured by the S&P/NZX 50 Index, eked out a small positive return in the second quarter of 2023.

Of the top 50 companies, four in particular stood out. Software company Serko Ltd reaffirmed its strong growth projections for next year and soared +56.9% over the quarter. Retirement village operators Arvida Group and Ryman Healthcare gained +38.0% and +25.3% respectively, with Arvida announcing a record profit this year and Ryman projecting a lift in net profits of 20-30% next year. Fletcher Building rounded out the notable performers, advancing +24.3% on the back of improved overall news flow.

It wasn’t such a memorable quarter for all New Zealand companies, however. Pharmaceutical supplier Ebos Group saw its share price slump -21.0% following news that the Chemist Warehouse would not be renewing a $1.9 billion supply contract when it expires next June. While a2 Milk shares drifted -14.3% following further weakness in Chinese infant formula demand.

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

 

Australian shares

+2.6%

The Australian share market (S&P/ASX 200 Total Return Index) registered a small gain in the second quarter, advancing +1.0% in Australian dollar terms.

Although numerous micro-cap basic materials firms and technology companies posted stellar gains during the quarter, these had a negligible impact on the performance of the market which is much more heavily influenced by the results of the big banking companies and the mega-cap basic materials firms, BHP and Rio Tinto.

With BHP and Rio Tinto down -4.7% and -4.5% respectively, on the back of ongoing weakness in iron ore and industrial metals prices, this was a major factor in the subdued performance of the index.

The major banks performed a little better on average, as two further increases in the Australian cash rate during the quarter were seen as a positive for bank lending margins and profitability. ANZ Group led the banking cohort gaining +6.9%, with the Commonwealth Bank (+2.0%) and Westpac (+1.8%), also recording gains.

While the local Australian index only recorded a small gain, the slightly weaker New Zealand dollar meant that reported returns to unhedged New Zealand investors improved to +2.6% over the quarter.

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

 

International fixed interest

-0.2%

The second quarter of 2023 saw a significant drop in bond market volatility.

Government bond yields were generally on the rise again, although there was some divergence. UK and Australian bonds both underperformed their peers due to reporting higher-than-expected inflation figures and a renewed resolve by these central banks to combat inflation.

With the exception of the Bank of Japan, all major central banks kept raising interest rates over the quarter. However, the US Federal Reserve was the first to pause in June, leaving short term US interest rates at 5%-5.25% after more than a year of consecutive rate increases.

With US growth surprising to the upside, and with a ‘soft landing’ scenario now being the market consensus, US corporate bonds outperformed US government bonds.

Over the quarter, the US 10 year bond yield increased from 3.47% to 3.84%, with the two year bond yield moving from 4.04% to 4.90%, marking a further inversion of the US yield curve. Germany’s 10 year bond yield rose more sedately from 2.30% to 2.39%, while the UK 10 year yield jumped from 3.49% to 4.39% on the back of disappointing inflation figures.

The FTSE World Government Bond Index 1-5 Years (hedged to NZD) returned -0.2% for the quarter, while the broader Bloomberg Global Aggregate Bond Index (hedged to NZD) gained +0.1%.

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

 

New Zealand fixed interest

+0.4%

Consistent with overseas trends, on 24 May the Reserve Bank of New Zealand (RBNZ) raised the Official Cash Rate (OCR) by a further 0.25% to a level of 5.50%.

In the accompanying monetary policy statement, the RBNZ noted that “inflation is expected to continue to decline from its peak and with it measures of inflation expectations. However, core inflation pressures will remain until capacity constraints ease further. While employment is above its maximum sustainable level, there are now signs of labour shortages easing and vacancies declining.”

New Zealand government bond yields rose during the quarter, with the New Zealand 10 year bond yield increasing from 4.23% to 4.65% by 30 June. With better-than-expected economic and company news helping ease investor concerns, New Zealand corporate bonds outperformed government bonds over the period.

The S&P/NZX A-Grade Corporate Bond Index rose +0.4% for the quarter, while the longer duration but higher quality S&P/NZX NZ Government Bond Index fell -1.6%.

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

 

 

Table 1: Asset class returns to 30 June 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)	+7.5%	+17.4%	+12.0%	+8.7%	+11.0%
	MSCI World ex Australia Index (net div.)	+9.0%	+20.8%	+14.1%	+11.3%	+12.2%
Emerging markets shares	MSCI Emerging Markets Index (gross div.)	+2.9%	+4.0%	+4.4%	+3.3%	+5.8%
New Zealand shares	S&P/NZX 50 Index (gross with imputation credits)	+0.4%	+10.6%	+2.1%	+6.7%	+11.5%
Australian shares	S&P/ASX 200 Index (total return)	+2.6%	+12.7%	+11.7%	+7.0%	+7.7%
International fixed interest	FTSE World Government Bond Index 1-5 Years (hedged to NZD)	-0.2%	-0.1%	-1.2%	+0.8%	+2.1%
	Bloomberg Global Aggregate Bond Index (hedged to NZD)	+0.1%	-0.3%	-3.1%	+0.6%	+3.0%
New Zealand fixed interest	S&P/NZX A-Grade Corporate Bond Index	+0.4%	+2.0%	-2.1%	+1.2%	+3.2%
New Zealand cash	New Zealand One-Month Bank Bill Yields Index	+1.4%	+4.5%	+1.9%	+1.7%	+2.2%

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 - June 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.