Key market movements - September 2024

Performance was generally positive across all asset classes through the third quarter of 2024, although all markets were certainly not created equally.

Interest rates remained a key focus for the quarter. Many central banks either began or continued to cut rates, with the US Federal Reserve, Bank of England, European Central Bank and the Reserve Bank of New Zealand, all delivering cuts. These cuts buoyed markets amid weakening economic data. In politics, the UK general election ended in a landslide victory for the Labour Party leading to renewed hope of an economic recovery. Kamala Harris replaced Joe Biden as the Democratic candidate for the US election in November, leading to a surge in support for the Democrats, becoming the marginal favourite over Donald Trump’s republican party, although this still looks too close call.

The artificial intelligence theme began to lose momentum, as investors became concerned over valuations and struggled to see real-world, revenue generating applications for the billions of dollars of investment in AI. These concerns, along with the beginning of a rate cutting cycle has led to a broadening theme across international share markets, with previously lagging sectors leading technology stocks in most markets.

Emerging share markets outperformed developed share markets over the quarter (excluding any currency hedging impacts) as Chinese shares rallied on the announcement of a massive economic stimulus package.

 

International shares

+4.6% (hedged to NZD)

+1.9% (unhedged)

Developed market shares were volatile within the quarter, but ultimately delivered gains. Returns were not broadly strong across all developed nations, rather, driven by continued exceptional performance from shares in the US.

The US market was up across the board, with 10 of 11 sectors delivering gains through the quarter and the S&P500 posting a +5.9% return (in unhedged US Dollars). Optimism for a soft landing, supported by the Federal Reserve’s 0.50% rate cut, strong corporate earnings and resilient economic data, led to a broadening of the rally with small companies outperforming larger companies. Utilities and real estate led the quarter, and the previously strong information technology sector lagged due to investor concerns over the monetisation of AI related capital expenditures.

Eurozone share market gains were muted in the third quarter. Weak demand from China as well as competition from cheap Chinese imports have led to concerns over Germanys reliance on manufacturing. Escalation of the conflict in the Middle East also contributed to a generally risk averse investor sentiment.

The Japanese share market was extremely volatile as the impact of increasing interest rates strengthened the Japanese Yen and severely dented company valuations. Despite that remarkable -12% day on 4 August, the Nikkei 225 declined ‘only’ -4.2% in the quarter in local terms and, thanks to a relatively strong Yen, advanced +2.8% in unhedged New Zealand dollar terms.

Against most other major currencies, the New Zealand dollar was stronger through the quarter which, in aggregate, meant lower reported returns from un-hedged foreign investments.

The MSCI World ex-Australia Index returned +4.6% for the quarter hedged to the New Zealand dollar and +1.9% for the unhedged index.

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

 

Emerging markets shares

+4.4%

Emerging markets shares delivered solid returns for the third quarter; the MSCI Emerging Markets Index up +6.3% in unhedged local currency.

Despite a weak start, Chinese shares delivered a strong quarter. In mid-September, the Chinese government announced a massive stimulus package to prop up businesses and the housing market, sending Chinese shares soaring. The S&P China 500 closed the quarter up +16.3% (in local Chinese yuan terms).

Indian shares delivered robust gains as the bull market continued, with the S&P India BMI up +7.8% (in local Indian rupee terms), driven by continued positive investor sentiment regarding Indian economic development. Thailand was a leader in the Emerging markets for the quarter, driven by the first phase of a government stimulus package delivered in September. Taiwan shares were down for the quarter due predominantly to the weak performance of technology stocks.

Shares in Latin America were strong in the third quarter of 2024 with the S&P Latin America BMI Index posting a +4.1% gain (in US dollars). Industrials and utilities were the best performing sectors while Information technology, energy and consumer staples all posted losses. Brazil was amongst the best performers for the quarter, up +4.7% (S&P Brazil BMI, in Brazilian real).

It was a good quarter overall for the underlying emerging markets group. The MSCI Emerging Markets Index producing a quarterly return of +4.4% for unhedged New Zealand investors.

Source: MSCI Emerging Markets Index (gross div.)

 

New Zealand shares

+6.4%

The New Zealand share market, as measured by the S&P/NZX 50 Index, delivered a solid return for the third quarter, driven by a rate cut and a more accommodating tone from the RBNZ.

The New Zealand market may be beginning to see the light at the end of the tunnel, as the RBNZ expressed confidence about inflation moving to within 1-3%, and finally cutting the OCR by 25 basis points in August, and by 50 basis points in October to 4.75%. The decline in inflation, as expected, has come at the expense of deteriorating economic data as the last 3 years of higher interest rates bite. The unemployment rate has continued to rise, currently sitting at 4.6% versus 3.2% at the end of 2021 (seasonally adjusted).

Good results were recorded by one of New Zealand’s largest retirement and aged care providers Arvida Group Ltd (+79%) following the announcement they will be fully acquired by an international buyer. A2 Milk also enjoyed a lift on the back of the Chinese stimulus which included a child allowance, which is likely to raise demand for a2’s milk powder. On the downside, Spark Ltd (-23.8%) declined after FY24 earnings were down 72% from FY23, significantly lower than analyst estimates.

September also saw two significant equity raises with Auckland Airport and Fletcher Building raising $1.4 billion and $700 million respectively in issuance of new shares. This influx in capital will help the airport finance current and future capital expenditure, and help the building materials provider to shore up their financials, in particular to meet near term debt obligations.

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

 

Australian shares

+7.1%

The Australian share market (S&P/ASX 200 Index) posted an outstanding quarter, rising +7.8% in Australian dollar terms.

Across Australian sectors, 9 of 11 posted gains with information technology and real estate leading the pack, and utilities and energy posting losses for the quarter. Materials had a significant rebound at the end of the month as the Chinese economic stimulus is expected to increase demand for Australian raw materials.

Among equity factors, the S&P/ASX 200 equal weight index marginally outperformed the cap weighted index, indicating an outperformance by small and mid-cap stocks. Value also outperformed the broad market with the S&P/ASX 200 Value index reporting an +8.8% gain for the quarter.

The Reserve Bank of Australia (RBA) has stayed steady, continuing to hold their target cash rate at 4.35% at the September meeting. Comments from the subsequent press conference suggests that despite August CPI coming in at 2.7%, the RBA doesn’t yet have sufficient confidence that inflation is sustainably within the target range of 2-3%. The Australian labour market remains tight with only a marginal increase in the unemployment rate reflecting the relatively lower interest rates our trans-Tasman neighbours have had to navigate.

Within the largest firms, there were notable performances from materials firms who stand to benefit from property development aspects of the Chinese stimulus package. Logistics software provider WiseTech Global (+36.9%) and supply chain logistics company Brambles Ltd (+33.0%) also rallied on the back of strong earnings reports. Cochlear Ltd (-14.4%) and Ramsey Healthcare (-11.5%) were among the worst performers of the quarter.

With the Australian dollar slightly weaker against the New Zealand dollar over the quarter, the reported returns to New Zealand investors were marginally lower.

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

 

International fixed interest

+3.0%

The third quarter of 2024 represented a turning point for international bond markets, with the US federal reserve finally gaining confidence that inflation is under control, and began to ‘recalibrate’ interest rates to a lower level with their first 0.50% cut. This, along with several other central bank rate cuts, led to bond yields generally falling, driving fixed interest returns strongly positive for the quarter.

US inflation moved up slightly, with 0.2% increases month-on-month in July and August, giving markets confidence that inflation is not falling uncontrollably, and bolstering the ‘soft landing’ narrative. The latest ‘dot plot’, showing the rate forecasts of Federal Reserve policymakers, indicated a further 25-50 bps of cuts this year, with the market currently pricing the higher cut in that band. The European Central Bank cut again in mid-September, dropping the ECB rate to 3.65% from 4.25%. While the Bank of England cut rates by 0.25% in July, with inflation approaching the 2% target and subdued GDP growth.

The US 10-year bond yield dropped from 4.39% to 3.79%, with the two-year bond yield moving from 4.75% to 3.65% marking the first time since mid-2022 that the 10 year has been yielding more than the two year. Germany’s 10-year bond yield fell from 2.49% to 2.13%, while the UK 10-year yield moved from 4.18% to 4.01%.

Japan is on a different trajectory with their central rates trending upwards, inflation rising slightly, and the 10-year bond yield stable (for now) around 1%, after spending the majority of the last decade at, or below 0%.

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) was up +4.2%.

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

 

New Zealand fixed interest

+3.8%

The RBNZ cut New Zealand’s Official Cash Rate by 0.25% to 5.25% at the 10 August announcement (and 0.50% more at the 9 October announcement).

Inflation expectations have the 1- and 2-year rates below 3% and broadly, economic indicators suggest that the NZ economy is continuing to slow, giving the RBNZ confidence that inflation is moving sustainably into the 1-3% target range. For example, weak housing data, decreased investment (as measured by building consents) and persistently lower retail sales all paint a picture of a softening economy. Combine these datapoints with rising unemployment and it seems likely that inflation is under control. The question now for the RBNZ becomes how quickly to cut rates to ensure that inflation doesn’t fall too far.

On the back of the general trend of falling bond yields internationally, the New Zealand 10-year bond yield decreased from 4.75% to 4.28% over the quarter.

The S&P/NZX A-Grade Corporate Bond Index gained +3.8% for the quarter, while the longer duration but higher quality S&P/NZX NZ Government Bond Index gained +4.0%.

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

 

Table 1: Investment class returns to 30 September 2024

Investment 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)	+4.6%	+30.4%	+9.2%	+12.4%	+11.0%
	MSCI World ex Australia Index (net div.)	+1.9%	+24.9%	+12.2%	+12.8%	+12.5%
Emerging markets shares	MSCI Emerging Markets Index (gross div.)	+4.4%	+19.4%	+3.6%	+5.8%	+6.6%
New Zealand shares	S&P/NZX 50 Index (gross with imputation credits)	+6.4%	+10.8%	-1.4%	+3.4%	+10.0%
Australian shares		+7.1%	+23.5%	+9.8%	+8.6%	+8.6%
International fixed interest	FTSE World Government Bond Index 1-5 Years (hedged to NZD)	+3.0%	+7.2%	+1.3%	+1.3%	+2.3%
	Bloomberg Global Aggregate Bond Index (hedged to NZD)	+4.2%	+10.2%	-0.6%	+0.3%	+2.9%
New Zealand fixed interest	S&P/NZX A-Grade Corporate Bond Index	+3.8%	+10.9%	+2.0%	+1.4%	+3.6%
New Zealand cash	New Zealand One-Month Bank Bill Yields Index	+1.4%	+5.7%	+4.2%	+2.7%	+2.5%

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 reported 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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