Market update – Quarter ending 31 March 2024

Market summary:

Global equity markets¹ continued their positive run from the previous quarter, returning 10.1% in local currency terms (15.2% NZD terms) over the March quarter, and reached a multi-year high. On a regional basis, among the major global equity markets, Japanese equities² returned 18.1% (JPY terms), followed by European equities³ which returned 12.8% (Euro terms) and US equities (S&P 500⁴ ) which returned 10.6% (USD terms) while UK equities⁵ lagged but generated a positive return of 4% (GBP terms). Emerging markets⁶ also lagged and returned 2.1% (USD terms). Within Emerging markets, Indian equities⁷ returned 6.1% (USD terms) while Chinese equities⁸ returned -2.2% (USD terms). Australian equities returned 4% (AUD terms) and outperformed New Zealand equities which returned 1.7% (NZD terms).   

At a sector level, Telecom services (+13.7%), Information technology (+12.8%), Financials (+12%) were the top three performing sectors. Real Estate (-0.9%), Utilities (+2.2%) and Consumer Staples (+5.6%) were key laggards. From a style perspective, Global Defensive⁹ (+5.1%) underperformed Global Cyclical¹⁰ (+9.1%) companies; while Growth¹¹ (+11.9%) comfortably outperformed Value¹² (+6.8%) companies. 

After the previous quarter’s sharp downward trajectory, bond yields backed up over the quarter. The NZ 10-year government bond yield moved up by 22bp to 4.54% while the yield on US 10-year Treasury bond moved up by 32bp to 4.2%. Consequently, fixed interest returns were muted over the quarter. NZ fixed interest (+0.3%) outperformed international fixed interest (0.1%). Corporate bonds (+0.8% for domestic corporate bonds and +0.4% for global corporate bonds) outperformed government bonds (+0.3% for NZ government bonds and -0.0% for global government bonds).

The NZ dollar fell 5.4% vs the US dollar and fell nearly 3% on a trade weighted basis over the quarter, despite global equity markets rising to a multi-year high. This resulted in NZD unhedged returns outperforming hedged returns. The oil price (WTI crude oil priced in US dollars/barrel) surged by 16% to US$83.2 amid signs of improving global demand, geopolitical tensions, and sustained production cuts by OPEC (Organization of the Petroleum Exporting Countries), while gold gained +8.1% (USD terms). 

Context:

The narrative for the March quarter revolved around the stock market's ability to continue to rally despite lower expectations for interest rate cuts by the major central banks. Notably, US equities rallied for a second straight quarter and the S&P 500 had its best performance to start a year since 2019. 

Central banks, led by the US Federal Reserve (Fed), initially pushed back against what was seen as overly aggressive financial market expectations for interest rate cuts at the end of December 2023, due to concerns over wage growth pressures and inflation not falling fast enough. As the quarter progressed, central banks then gradually guided markets towards a more appropriate stance on interest rate reductions. At quarter-end, market expectations were for approximately three 25bp interest rate cuts this year, down from expectations for five to six interest rate cuts at 2023 year-end. 

Despite this, a key driver for share markets remained the firmer than expected growth backdrop that fits with the “soft landing” scenario, i.e. relatively stable growth in the major economies, with no major shocks disrupting markets. This was supported by US GDP data which indicated that the US economy expanded by a faster pace than previously believed, with consumer spending a key tailwind. Additionally, labour market data was a bright spot together with an index of leading economic indicators which turned positive in February, snapping a 23-month streak of negative readings.

The previous (December) quarter earnings season was largely supportive for the market as earnings surprised to the upside by ~4%, with profit margins a bright spot. While there was some scrutiny surrounding softer company guidance for the March quarter, a research note from Bank of America pointed out that its Corporate Sentiment Indicator had improved sequentially to near record highs. 

The artificial intelligence (AI) growth theme was another key tailwind in the quarter that helped drive select big technology outperformance. This was underpinned by outsized earnings growth from select mega-cap technology names. Pleasingly, there was some improvement in market breadth as the quarter progressed and this fitted in with the macro resilience narrative. Additionally, a fairly stable consensus for low-double-digit S&P 500 earnings growth in 2024, supported by sell-side strategist price target upgrades, an increase in corporate share buybacks and strong inflows in equities over the quarter kept market sentiment buoyant. 

Aside from potential productivity gains from AI proliferation, the other upbeat themes over the quarter were profit margin cushion from expense control initiatives, the manufacturing cycle, consumer travel and infrastructure growth.

In contrast, fixed-interest market returns were muted. As markets repriced their expectations for a delay in interest rate cuts, bond yields rose over the quarter. In Japan, the Bank of Japan (BOJ) ended its negative interest rate policy and its yield-curve control policy (targeting specific interest rates on Japanese government bonds) marking the end of an era of extraordinary accommodative monetary policy. These changes were however well-telegraphed and resulted in minimal immediate market impact.

In New Zealand, economic growth for the quarter ending December 2023 (GDP) printed a marginally negative number. This followed the previous quarter’s decline in economic activity and, further, marked the fourth quarterly contraction in the economy out of the past five quarters. At its monetary policy meeting in February, the Reserve Bank of New Zealand (RBNZ) said that risks to the inflation outlook have become more balanced and softened its previous intentions of further rate hikes to get inflation back to its target range. While the RBNZ indicated the possibility of reductions in the official cash rate in 2025, financial markets began to speculate on rate cuts starting as soon as August this year.     

Looking ahead, analysts retain their view of continued economic resilience. However, downside risks include sticky core services inflation in the US, evidenced in the hotter than expected January and February inflation data releases over the quarter. This may delay and/or limit the extent of interest rate cuts and in turn limit further upside for stocks, especially for the mega-cap names. Also, softer consumer spending data in February and dampened pricing power are a key risk to earnings growth. Additionally, commercial real estate exposure in regional banks remains an overhang, however policy officials and industry leaders are of the view that contagion risk appears limited.   

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

_{²Topix Total Return Index (JPY)}

_{³Euro Stoxx 50 Total Return Index (EUR)}

_{⁴S&P 500 Total Return Index (USD)}

_{⁵FTSE 100 Total Return Index (GBP)}

_{⁶MSCI Emerging Markets NTR Index (USD)}

_{⁷MSCI India Net Total Return (USD)}

_{⁸MSCI China Net Total Return (USD)}

_{⁹GS World Defensive sectors (local currency)}

_{¹⁰GS World Cyclical sectors (local currency)}

_{¹¹MSCI World index growth (local currency)}

_{¹²MSCI World Index Value (local currency)}

_{Source: BT Funds Management}