Market summary:

It was a strong quarter for both equities and bonds.

Global equity markets^[1] had a volatile but positive September quarter, returning +4.4% in local currency terms. On a regional basis, among the major global equity markets, US equities^[2] returned 5.6% (USD terms), followed by UK equities^[3] which returned 1.8% (GBP terms) and European equities^[4] which returned 1.7% (Euro terms).  Japanese equities^[5] struggled in early August on the back of the Bank of Japan’s unexpected interest rate hike and returned -4.9% (JPY terms). Emerging markets^[6] returned 8.7% (USD terms) with Chinese equities^[7] surging in September and returning +23.5% (USD terms) as Chinese policy makers announced several measures to stimulate the economy, while Indian equities^[8] returned 7.3% (USD terms). Closer to home, Australian equities returned 7.8% (AUD terms) and outperformed New Zealand equities which returned 5.4% (NZD terms).  

At a sector level, the real estate sector (+16.6%) and the utilities sector (+15.9%) were the top performing sectors, followed by materials (+8.2%), financials (+8%), industrials (+7.9%) and consumer staples (+7.4%). Energy (-4%), information technology (-0.2%) and telecom services (+1.7%) were the key laggards. From a style perspective, Global Defensives^[9] (+8.1%) outperformed Global Cyclical^[10] (+5.5%) companies; while Value^[11] (+7.1%) comfortably outperformed Growth^[12](+0.5%) companies.

Bond yields fell sharply over the quarter, driven by a big re-pricing of interest rate expectations relative to a few months ago and consequently boosted fixed interest returns. The New Zealand 10-year government bond yield fell 43bp to 4.24% while the yield on US 10-year Treasury bonds fell 62bp to 3.78%. New Zealand fixed interest^[13] (+3.9%) underperformed international fixed interest^[14] (4.2%). Corporate bonds (+4.1% for domestic corporate bonds and +4.5% for global corporate bonds) outperformed government bonds (+3.9% for New Zealand and +3.9% for global).

The New Zealand dollar gained 4.2% vs the US dollar and fell nearly 0.1% on a trade weighted basis over the quarter. This resulted in NZD unhedged returns underperforming hedged returns. The oil price (WTI crude oil priced in US dollars/barrel) fell 16.4% to US$68.2 amid concerns about sluggish China economic growth prospects and rising OPEC+ production, while gold gained +13.2% (USD terms).

Context:

While the previous quarter was dominated by the performance of a select few mega-cap companies and a shift to a more cautious outlook regarding the timing of interest rate reductions, the September quarter saw solid performance from a broader spectrum of companies and increasing expectations for interest rate cuts in 2024. This was supported by: (1) further evidence of declining inflation, which allowed the US Federal Reserve (‘US Fed’) to shift its focus to supporting economic growth by lowering interest rates, and (2) growing confidence that the US economy would avoid a recession and company profits remaining robust.

There was a period of market turmoil in early August in the wake of the Bank of Japan’s end-July rate hike which led to sharp declines in Japanese equities, and this coupled with some soft US economic data releases spread fear globally. A measure of market volatility (the VIX index) rose intraday to 60, a level normally associated with a crisis (surpassed only during the GFC and the height of the COVID-shock), before quickly stabilising.

A lower-than-expected growth in US job numbers for July (revised even lower subsequently) sharply refocused attention on the risks to the US Fed’s target of promoting maximum employment while promoting price stability. The US Fed’s ultimate decision to start its interest rate easing cycle with a 50bp cut (higher than some analyst expectations of a 25bp rate cut) in September was welcomed by markets and was not interpreted as a sign of dire conditions in the economy. Additionally, robust retail sales reports helped reassure markets that consumer demand was still holding up. The corporate backdrop was also seen as generally healthy as companies in the S&P 500 index saw 11.3% y/y earnings growth for the June quarter, the highest level since December 2021.

Looking forward, optimism in markets remains founded on the US Fed continuing to lower interest rates, though there will be a lot of attention on the pace of rate cuts. Other key supportive pillars include continued disinflation, a broadly stable labour market, still-healthy consumer spending, continued profit growth prospects, and the ongoing AI secular growth theme. On the other side of the ledger, valuations do remain quite high, and consumer confidence seems to be fraying with some worries about when the trend might flip from slower hiring to rising downsizing.   

In Europe, Germany struggled as a key measure of business sentiment declined for the fifth consecutive month while French President Macron faced challenges in forming a stable government following the July parliamentary elections.  The European Central Bank (ECB) cut rates twice during the quarter and emphasised a data-dependent approach moving forward. Looking ahead, some analysts are forecasting modest gains for European stock markets, citing potential interest rate cuts and attractive valuations relative to the US market, although optimism is tempered by concerns over sluggish growth and productivity, and political and economic uncertainties.

On the domestic front, the unemployment rate rose to a fresh three-year high of 4.6%, sales data confirmed the dire conditions facing retailers and the June quarter GDP contracted slightly less than most expected, but consistent with the narrative that New Zealand’s economy has been struggling for a while. The Reserve Bank of New Zealand (RBNZ) started its interest rate easing cycle earlier than some forecasters expected by delivering an interest rate cut of 25bp in August. Towards the end of the quarter, markets priced in a more aggressive interest rate easing cycle by the RBNZ (50bp rate cuts over forthcoming meetings, with over 120bps of cuts priced through the three meetings to February 2025), which was subsequently confirmed by a 50bp cut after the quarter end.

^[1]MSCI World Net Index (local currencies)

^[2] S&P 500 Total Return Index (USD)

^[3] FTSE 100 Total Return Index (GBP)

^[4] Euro Stoxx 50 Total Return Index (EUR)

^[5] Topix Total Return Index (JPY)

^[6]MSCI Emerging Markets NTR Index (USD)

^[7] MSCI China Net Total Return (USD)

^[8] MSCI India Net Total Return (USD)

^[9] GS World Defensive sectors (local currency)

^[10]GS World Cyclical sectors (local currency)

^[11]MSCI World Index Value (local currency)

^[12]MSCI World index growth (local currency)

^[13]Bloomberg NZBond Composite 0+Yr

^[14]Bloomberg Global Aggregate Total Return Index Hedged NZD