Key market movements - June 2024

International share markets gained overall in the second quarter of 2024, although individual country returns were mixed.

Politics was a key focus this quarter. The recent European Union parliamentary elections saw significant gains for right-wing nationalist parties. In the UK, the general election in early July resulted in a change of government. Meanwhile, President Joe Biden has announced at the last minute that he will not seek re-election, endorsing Kamala Harris as his successor. However, the identity of the next Democratic nominee remains uncertain.

Outside of this, the artificial intelligence 'theme' continued to lead markets, while policymakers continued to wrestle with how much (and when) to reduce interest rates.

With a slowing in economic activity in the US and weakening economic indicators in the Eurozone and UK, the case for interest rate reductions remains broadly intact. The only element not playing its part is inflation which is remaining a little higher and ‘stickier’ in some regions than the central bankers are generally comfortable with.

Emerging share markets outperformed developed share markets over the quarter (excluding any currency hedging impacts) as softer US macroeconomic data helped ease concerns about the timing of US interest rate cuts, and a welcome rebound in Chinese shares helped propel emerging market returns overall.

 

International shares

+3.2% (hedged to NZD)

+0.7% (unhedged)

Share markets in the developed economies generally delivered gains in the second quarter.

The US market was again led higher by the information technology and communication services sectors. Ongoing enthusiasm around artificial intelligence continued to boost related companies, such as microprocessor manufacturers and AI software developers, amid some strong earnings and outlook statements.

European share markets were mixed in the second quarter, amid uncertainty caused by the announcement of parliamentary elections in France and dwindling expectations for steep interest rate cuts (with euro area inflation actually increasing from 2.4% in March to 2.5% in June).

The FTSE 100 achieved all-time highs as UK shares rose over the quarter. After delivering relatively strong economic growth in the first quarter, data early in the second quarter pointed to a slowdown with the economy shedding 140,000 jobs in April.

Against most major currencies, the New Zealand dollar was stronger through the quarter, which meant higher reported returns for investors holding hedged foreign assets.
The MSCI World ex-Australia Index returned +3.2% for the quarter hedged to the New Zealand dollar and +0.7% for the unhedged index.

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

 

Emerging markets shares

+3.1%

Emerging markets shares delivered more solid returns than their developed counterparts, although the stronger New Zealand dollar was a factor in reducing the size of the reported gains.

Shares in China rallied strongly over the quarter as low valuations for many Chinese companies encouraged investors to return. Optimism about the authorities’ support for the housing sector and President Xi’s reform rhetoric was also beneficial.

Indian shares delivered robust gains, driven by continued positive investor sentiment. Indian benchmark indices reached record highs at the end of the quarter, with media and banking stocks leading the way. Taiwan also posted a strong return against a backdrop of continued investor enthusiasm for technology companies, particularly those benefitting from the positive sentiment linked to AI-related businesses.

Brazil and Mexico were amongst the worst performers for the quarter. Flooding in Brazil’s southern state of Rio Grande do Sul prompted investor concerns about economic growth, spending and inflation. Meanwhile, in Mexico, Claudia Sheinbaum’s election as president and her Morena party’s super majority in the lower House of Congress raises the prospect of institutional weakening if Morena is able to pass constitutional reforms, including judicial reform. The associated risks here were poorly received by the market.

It was a useful quarter overall for the underlying emerging markets group. While the MSCI Emerging Markets Index produced a quarterly return of +6.3% in local currency terms, the stronger New Zealand dollar reduced the gains to unhedged investors.

Source: MSCI Emerging Markets Index (gross div.)

 

New Zealand shares

-3.1%

The New Zealand share market, as measured by the S&P/NZX 50 Index, delivered a negative return for the second quarter, generally lagging global peers.

Hanging over the performance of the local share market has been persistent weakness in economic indicators. Forward economic activity indicators point towards a potential contraction in New Zealand’s GDP for the second quarter, running with a notable decline in GDP per capita and a contraction in the services industries. The labour market is also showing signs of loosening, with a decline in job advertisements and an anticipated acceleration in the unemployment rate.

The Reserve Bank of New Zealand (RBNZ) continues to be faced with the delicate task of balancing the risk of managing current high inflation against the possibility that inflation may decline much more rapidly than expected over the medium term.

From within the top 50 companies, good results were recorded by Fisher & Paykel Healthcare (+18.2%) following the announcement of a 6% gain in annual net profit, and Meridian Energy shares (+6.4%) gained on the back of solid retail sales volumes. On the downside, Fletcher Building Ltd (-31.3%) reduced its profit guidance citing difficult housing market conditions, and SkyCity Entertainment (-29.8%) declined steadily through the quarter.

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

 

Australian shares

-0.6%

The Australian share market (S&P/ASX 200 Total Return Index) recorded a small decline in the second quarter, falling -1.1% in Australian dollar terms.

Returns tended to be slightly better in the larger capitalisation companies over the quarter and, breaking ranks with global peers, it was the utilities sector which was easily the strongest performing sector of the Australian market. The energy, real estate and materials sectors were the weakest in a quarter where losing sectors outnumbered winners by six to five.

Within the largest 50 firms, which is where the bulk of the ASX 200 index return generally comes from, there were notable performances from healthcare software provider Pro Medicus (+38.1%) and gold mining company Newmont Corporation (+18.7%).

However, in a period where the overall returns were weak, there were at least as many firms that struggled, including financial technology firm Block Incorporated (-25.5%) along with James Hardie Industries (-23.2%). James Hardie is the world’s largest fibre cement maker and has forecast a fall in profits over the next year due to reduced demand for its products.

With the Australian dollar very slightly stronger against the New Zealand dollar over the quarter, the reported returns to unhedged New Zealand investors rose to -0.6%.

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

 

International fixed interest

+0.9%

The second quarter of 2024 commenced on a disappointing note for global bond markets, with renewed concerns about US inflation causing investors to reassess the likely timing of interest rate cuts. However, later in the quarter a more favourable market environment was driven by the emergence of softer labour market conditions, and encouraging news on inflation.

With US inflation easing slightly from 3.5% in March to 3.0% in June, the latest “dot plot” showing the rate forecasts of Federal Reserve policymakers indicated just one interest rate cut this year. The European Central Bank proceeded with a 0.25% interest rate cut in early June, although scope for further cuts appear limited by ‘sticky’ inflation readings in the region. While in the UK, despite slowing growth and encouraging inflation trends, the Bank of England left its base rate unchanged over the quarter.

The US 10 year bond yield climbed from 4.21% to 4.41%, with the two year bond yield moving from 4.63% to 4.75%. Germany’s 10 year bond yield rose from 2.29% to 2.49%, while the UK 10 year yield moved from 3.94% to 4.18%.

The FTSE World Government Bond Index 1-5 Years (hedged to NZD) returned +0.9% for the quarter, while the broader Bloomberg Global Aggregate Bond Index (hedged to NZD) was up +0.1%.

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

 

New Zealand fixed interest

+1.2%

The Reserve Bank of New Zealand (RBNZ) left New Zealand’s Official Cash Rate (OCR) unchanged at 5.50% at 10 April and 22 May announcements, extending the sequence to eight ‘holds’ since May 2023.

While the RBNZ acknowledge weaker capacity pressures and an easing labour market are reducing domestic inflation, it also points out that certain sectors of the economy are less sensitive to interest rates. For example, higher rents, insurance costs, council rates, and other domestic services costs are contributing to New Zealand’s overall inflation figure, which is still above the RBNZ’s target band.

As it has signalled for some time, the RBNZ reiterated that it wants to see inflation back in the target 1% to 3% band before moving to reduce interest rates. With unemployment having risen post the election and evidence of reduced spending across the economy, the only open question now is - how long will it take for inflation to fall back into the target band? The latest reading, for the 12 months ended June 2024 was 3.3%, suggesting it could be sometime soon.

On the back of the general trend of rising bond yields internationally, the New Zealand 10 year bond yield increased from 4.61% to 4.75% over the quarter.

The S&P/NZX A-Grade Corporate Bond Index gained +1.2% for the quarter, while the longer duration but higher quality S&P/NZX NZ Government Bond Index gained +0.5%.

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

 

 

Table 1: Asset class returns to 30 June 2024

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)	+3.2%	+21.6%	+7.8%	+11.7%	+10.7%
	MSCI World ex Australia Index (net div.)	+0.7%	+21.2%	+11.9%	+14.1%	+13.3%
Emerging markets shares	MSCI Emerging Markets Index (gross div.)	+3.1%	+13.8%	-0.2%	+5.5%	+7.0%
New Zealand shares	S&P/NZX 50 Index (gross with imputation credits)	-3.1%	-0.8%	-1.7%	+3.0%	+9.7%
Australian shares	S&P/ASX 200 Index (total return)	-0.6%	+13.1%	+7.1%	+8.3%	+8.2%
International fixed interest	FTSE World Government Bond Index 1-5 Years (hedged to NZD)	+0.9%	+4.7%	+0.3%	+0.9%	+2.1%
	Bloomberg Global Aggregate Bond Index (hedged to NZD)	+0.1%	+3.8%	-1.9%	+0.0%	+2.6%
New Zealand fixed interest	S&P/NZX A-Grade Corporate Bond Index	+1.2%	+6.3%	+0.3%	+1.1%	+3.4%
New Zealand cash	New Zealand One-Month Bank Bill Yields Index	+1.4%	+5.8%	+3.7%	+2.5%	+2.4%

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 2024'

 

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