Key market movements - March 2024

International share markets registered further strong gains in the first three months of 2024. A resilient US economy and ongoing investment enthusiasm for companies associated with artificial intelligence technologies were two of the key drivers.  

US Federal Reserve Chairman, Jerome Powell, attempted to cool expectations of imminent interest rate cuts, but with the latest “dot plot” detailing US policymakers’ expectations of three rate cuts later this year, share market investors were undeterred.

Global economic activity remained positive with the US economy continuing to lead the way. With easing US inflation contributing to rising real wages there, this has boosted US consumer spending and growth. Other regions are emerging from their post-Covid weakness at different rates. The Eurozone is seeing fledgling signs of a recovery in their services sector and manufacturing, while China’s recovery also remains broadly intact, although the Chinese property sector continues to struggle.

A cautionary approach from most central banks reinforced the likelihood that interest rate cuts are now only expected to commence later this year (in some regions). This contributed to a period of low returns for bond markets as most long term government bond yields rose over the quarter.

 

International shares

+10.5% (hedged to NZD)

+15.4% (unhedged)

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

US shares were boosted by good corporate earnings announcements, including from some of the large technology companies. Economic data generally demonstrated the ongoing resilience of the economy with annualised GDP growth for the December quarter revised up to 3.4%.

Eurozone shares also posted strong gains in the first quarter. AI-related technologies continued to benefit from strong investor sentiment while financials, consumer discretionary and industrial companies also generally performed well. With signs of improving business activity and inflation continuing to moderate (the consumer price index moved from 2.9% in December to 2.4% in March), there were reasons for optimism.

UK shares also rose over the quarter in spite of official data showing the economy had entered a technical recession in the second half of 2023. The Japanese share market experienced an exceptionally strong rally with the Nikkei 225 index surpassing the 40,000 yen level and reaching a new all-time high.

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

The MSCI World ex-Australia Index returned +10.5% for the quarter hedged to the New Zealand dollar and +15.4% for the unhedged index.  

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

 

Emerging markets shares

+8.4%

Emerging markets shares delivered solid returns to unhedged investors, with the weaker New Zealand dollar helping amplify returns.

Despite rallying a little in the middle of the period, Chinese shares ended the quarter modestly lower as some caution remains about the outlook for the Chinese economy.  However, investors in Taiwan, India and the Philippines saw share prices bouncing back from recent lows amidst cautious optimism that the period of gloom surrounding China may be slowly starting to lift.

Index heavyweight Taiwan outperformed strongly on the back of continued investor enthusiasm about artificial intelligence and the technology sector. January’s presidential election saw the ruling Democratic Progressive party remain in power but lose its majority in parliament. The markets took this news in their stride as it makes continuation of the status quo more likely.

India also outperformed, helped by local currency strength ahead of April’s general election, in which incumbent Prime Minister Modi seeks a third term. Korea posted a positive return but underperformed broader emerging markets due to weakness in speculative AI and battery companies. 

While it was a moderate quarter overall for the underlying emerging markets group, with the MSCI Emerging Markets Index producing a quarterly return of +4.6% in local currency terms, the weaker New Zealand dollar magnified 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 good return for the first quarter, even if it tended to lag the returns of a number of global peers.

The local share market has been facing slightly stronger 'headwinds’ as inflation has stayed more elevated here necessitating a stronger monetary policy response. This, in turn, has brought with it some additional uncertainty and the potential for a larger slowdown in economic activity.

We received some initial insight into this when New Zealand’s fourth quarter GDP figure came in below expectations at -0.1%. This signalled a return to a technical recession in New Zealand following a negative third quarter in 2023. The surprise in this data was that the significant injection of new migrants to New Zealand over recent months was still not enough to drag New Zealand’s nominal GDP growth into the positives, as many had expected.    

From within the top 50 companies, the best results came from a2 Milk (+47.4%) on the back of reported growth in revenue and profits, and cleantech solutions provider Gentrack Group (+34.4%), also on the back of very strong reported growth figures.

Unfortunately, a few notable companies didn’t fare quite so well during the quarter with Fletcher Building (-13.8%), Tourism Holdings (-16.2%) and Ryman Healthcare (-22.9%) all feeling the effects of New Zealand’s tighter economic conditions.

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

 

Australian shares

+6.6%

The Australian share market (S&P/ASX 200 Total Return Index) recorded a strong gain in the fourth quarter, rising +5.3% in Australian dollar terms.

Returns tended to be stronger in some of the lesser-known company names, with smaller companies, on average, delivering higher returns than larger companies. The global hype behind AI (and information technology companies more generally) resulted in information technology being the clear best performing sector over the quarter, albeit only representing 3% of the Australian market. Real estate, consumer discretionary and the important financials sector also performed well.

The materials sector was the only sector to decline over the quarter, dragged down by industry heavyweights BHP (-10.0%) and Rio Tinto (-7.4%), as iron ore prices fell by around 20% over the three months. The price of the mineral has drifted lower this year following a period of lower global economic growth and weaker demand from key markets, such as China.

While a number of very small Australian firms posted some significant gains, the most notable gains from firms inside the top 100 came from software applications firm Altium Ltd (+39.9%) and diversified real estate company Goodman Group (+33.6%). 

With the Australian dollar relatively strong against the New Zealand dollar over the quarter, the reported returns to unhedged New Zealand investors rose to +6.6%.

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

 

International fixed interest

+0.2%

The first quarter of 2024 saw yet another ‘topographical change’ in the landscape of inflation and interest rate expectations.

Inflation continues to be the central concern for bond markets and, initially, the markets were anticipating faster central bank action to lower interest rates globally. However, these expectations were generally scaled back during the quarter with the major central banks all adopting a more overt “proceed with caution” approach.

In general, the central banks don’t want to be seen to be premature in dropping interest rates and risking the embarrassment - and adverse economic impact - of potentially having to quickly backtrack by putting interest rates back up again. While this might only delay broader based interest rate reductions (in some regions) until later in the year, it was enough to send government bond yields higher over the first quarter.

The US 10 year bond yield climbed from 3.87% to 4.21%, with the two year bond yield moving from 4.25% to 4.63%. Germany’s 10 year bond yield rose from 2.03% to 2.29%, while the UK 10 year yield moved from 3.54% to 3.98%.

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) was unchanged over the quarter.

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

 

New Zealand fixed interest

+0.6%

The Reserve Bank of New Zealand (RBNZ) shocked no-one by leaving interest rates unchanged in its 28 February meeting (and again, at time of writing, on 10 April).

Maintaining the same ‘cautious’ approach being adopted by many major central banks overseas, the RBNZ has made it clear they want to see inflation come back into their target band before considering interest rate reductions.

While the approach is understandable, it has established an informal game of ‘monetary policy chicken’, whereby the RBNZ are projecting that interest rate reductions won’t start before 2025, while an increasing number of market commentators are predicting, based on continuing weakness in the economy, that rate cuts could start as early as August this year. 

While there is still time for the RBNZ to modify their view to align with the wider market, it has a clear risk aversion to the idea of cutting interest rates too early. While all participants are broadly in agreement the next rate movement is more likely to be downwards, for now we can only watch and wait (and guess) as to the likely timing.

On the back of the general trend of rising bond yields internationally, the New Zealand 10 year bond yield increased from 4.39% to 4.64% over the quarter. 

The S&P/NZX A-Grade Corporate Bond Index gained +0.6% for the quarter, while the longer duration but higher quality S&P/NZX NZ Government Bond Index declined -0.2%.

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 March 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)	+10.5%	+26.6%	+9.3%	+11.7%	+10.9%
	MSCI World ex Australia Index (net div.)	+15.4%	+31.2%	+14.5%	+15.1%	+13.7%
Emerging markets shares	MSCI Emerging Markets Index (gross div.)	+8.4%	+13.7%	+0.4%	+5.3%	+7.3%
New Zealand shares	S&P/NZX 50 Index (gross with imputation credits)	+3.1%	+2.7%	-0.4%	+5.0%	+10.0%
Australian shares	S&P/ASX 200 Index (total return)	+6.6%	+16.8%	+9.7%	+10.1%	+8.5%
International fixed interest	FTSE World Government Bond Index 1-5 Years (hedged to NZD)	+0.2%	+3.6%	+0.0%	+1.0%	+2.2%
	Bloomberg Global Aggregate Bond Index (hedged to NZD)	+0.0%	+3.8%	-1.6%	+0.5%	+2.9%
New Zealand fixed interest	S&P/NZX A-Grade Corporate Bond Index	+0.6%	+5.5%	+0.0%	+1.2%	+3.4%
New Zealand cash	New Zealand One-Month Bank Bill Yields Index	+1.4%	+5.7%	+3.3%	+2.3%	+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 - March 2024'

 

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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.