Market update – Quarter ending 31 December 2024

Market summary:

Growth assets (equities) had positive returns while income assets were muted. It was a strong quarter for the US dollar, with the US dollar index up 7.6%, its biggest quarterly gain since March 2015.

Global equity markets¹ had a positive but volatile December quarter, returning +1.9% in local currency terms. At a sector level, the consumer discretionary sector (+11.5%), the information technology sector (+7.9%) and the financial sector (+7.7%) while the materials sector (-10.2%), the healthcare sector (-9.2%) and the listed real estate sector (-8.2%) were the key laggards. From a style perspective, Global Cyclical² (+1.3%) outperformed Global Defensives³ (-5.5%) companies; while Growth⁴ (+7.1%) comfortably outperformed Value⁵ (-2.4%) companies.

On a regional basis, among the major global equity markets, Japanese equities⁶ returned +5.4% (JPY terms); US equities⁷ returned 2.8% (USD terms), up for a fifth-straight quarter setting fresh record highs. UK equities⁸ were flat over the quarter (-0.2% in GBP terms) while European equities⁹ returned -1.8% (Euro terms).  Emerging markets¹⁰ lagged, returning -8.2% (USD terms) with Chinese equities¹¹ returning -7.8% (USD terms) and Indian equities¹² returning -10.8% (USD terms). Closer to home, Australian equities returned -0.9% (AUD terms) underperforming New Zealand equities which returned 5.5% (NZD terms).  

Interest-rate markets viewed Trump’s election pledges as inflationary and possibly leading to higher-for-longer US interest rates. US Treasuries saw a sharp selloff this quarter with the two-year yield up 60bp and 10-year yield up nearly 80 bp. Global bonds consequently had negative returns. However, NZ bonds managed to eke out positive returns. The NZ 10-year government bond yield rose 17bp to 4.41% while the yield on US 10-year Treasury bonds rose 78bp to 4.56%. NZ fixed interest¹³ (+0.7%) outperformed international fixed interest¹⁴ (-1.2%). NZ corporate bonds (+1.3%) outperformed NZ government bonds (+0.5%).

The NZ dollar fell sharply vs the US dollar, down 11.9% and nearly 6% on a trade weighted basis over the quarter. This resulted in NZD unhedged returns comfortably outperforming hedged returns. The oil price (WTI crude oil priced in US dollars/barrel) gained 5.2% to end the year at US$71.7 while gold declined marginally (-0.4% in USD terms), the first quarterly decline in five quarters.

Context:

Trump’s decisive win in the November US presidential election removed the election uncertainty and raised expectations for stronger economic growth in the US. The US Federal Reserve (‘Fed’) cut interest rates twice, by 25bp each in November and December. However, the disinflation trend stalled this quarter and at year-end, financial market expectations for future Fed interest rate cuts fell from four to five interest rate cuts in 2025 to just one rate cut or at most two interest rate cuts. Concerns over the inflationary impact of Trump’s election pledges, which included imposing trade tariffs and tightening immigration, along with a deteriorating US fiscal deficit trajectory, contributed to a sharp sell-off in US Treasury bond yields.

In a notable divergence from the US, European economic data continued to weaken, prompting the European Central Bank to implement back-to-back rate cuts for the first time in over a decade to support the Eurozone economy. UK’s markets, especially UK Government bonds and the pound experienced turbulence after UK’s Chancellor unveiled an inaugural budget that was marked by substantial increases in spending, taxation and borrowing. In Asia, equities along with most regional bond markets fell over the quarter as well as regional currencies vs the US dollar over the prospect of potentially large tariffs once Trump takes office. Chinese government bonds were an exception with yields falling steadily (bond prices rising) as the positive sentiment from Beijing's launch of fiscal support efforts earlier in the year, gave way to doubts about the extent to which growth will benefit.

On the domestic front, the Reserve Bank of New Zealand (‘RBNZ’) delivered a 50bp cut to the official cash rate (‘OCR’) in October and followed it with another 50bp cut in November, taking it to 4.25%. New Zealand’s GDP data release indicated that the economy in the September quarter shrank (1.0%) quarter-on-quarter, worse than the (0.2%) contraction expected, confirming New Zealand has again entered a recession with the economy experiencing its largest half-year contraction since the early 1990s outside of the pandemic. At month-end, financial markets were pricing a 2025 ending OCR of 3.00%, implying (125 bp) of easing from current OCR levels and (50 bp) more than the RBNZ's own projections. The RBNZ expects economic growth to recover in 2025 as lower interest rates support demand and private investment. In contrast, Australia’s employment data continues to indicate a tight labour market and the Reserve Bank of Australia left its cash rate unchanged at 4.35% as expected.

As we look to 2025, the global economy is expected to continue diverging, influencing market trends through varying growth rates, monetary policies, geopolitical uncertainties and region and sector-specific developments. While there is cautious optimism in the equity markets due to strong corporate earnings, uncertainties surrounding Trump's policies could lead to market volatility. This macro environment presents opportunities for our active managers to acquire high-quality assets. Ensuring your portfolio is well diversified remains essential.

_{¹MSCI World Net Index (local currencies)}

_{²GS World Cyclical sectors (local currency)}

_{³GS World Defensive sectors (local currency)}

_{⁴MSCI World index growth (local currency)}

_{⁵MSCI World Index Value (local currency)}

_{⁶Topix Total Return Index (JPY)}

_{⁷S&P 500 Total Return Index (USD)}

_{⁸FTSE 100 Total Return Index (GBP)}

_{⁹Euro Stoxx 50 Total Return Index (EUR)}

_{¹⁰MSCI Emerging Markets NTR Index (USD)}

_{¹¹MSCI China Net Total Return (USD)}

_{¹²MSCI India Net Total Return (USD)}

_{¹³Bloomberg NZBond Composite 0+Yr}

_{¹⁴Bloomberg Global Aggregate Total Return Index Hedged NZD}