Global shares
Global share markets made strong gains in the March quarter, with the MSCI ACWI Index ‒ Net returning 14.5% in unhedged New Zealand dollar (NZD) terms. Stocks continued to be influenced in large part by the outlook for global interest rates. In the US, the Federal Reserve (Fed) maintained its benchmark fed funds rate at a target range of between 5.25% and 5.50% throughout the period. Speaking after the Bank’s January gathering, chairman Jerome Powell acknowledged that it would be appropriate to start lowering interest rates sometime this year; though he wouldn’t be drawn on specific timing. He did add, however, that a March rate cut was unlikely as the Bank had yet to reach a point where it was confident that inflation was coming down sustainably toward its 2.0% target. He also reiterated that the Fed sees three interest rate cuts this year. At the time, the market was betting the Fed would cut rates six times in 2024; the first of which was pencilled in for March. Powell went on to say that whilst the Fed believes interest rates have peaked for this tightening cycle, policymakers remain wary of cutting rates too quickly as doing so could potentially cause inflation to reaccelerate. He provided similar messaging following the Bank’s March gathering, saying that policymakers wanted to see further evidence inflation is cooling toward its 2.0% target whilst signalling the Bank still expects to cut interest rates three times this year. We saw a similar theme play out in the UK and Europe. Meanwhile, the Bank of Japan raised interest rates for the first time in 17 years in March amid signs of healthy inflation; the Bank lifting the overnight call rate to a target range of between 0.00% and 0.10%.
At the country level, the benchmark US S&P 500 Index (10.2%), the tech-heavy NASDAQ Composite (9.1%) and the Dow Jones Industrial Average (5.6%) all posted strong gains for the quarter. Stocks were also higher in Japan (17.0%1 ), Europe (12.4%2 ), China (3.1%3 ) and the UK (2.8%4 ).
New Zealand shares
The New Zealand share market was positive in the first quarter, returning 3.1%5 . Contributing to the advance was a strong lead from major overseas markets, with stocks in the US, Europe and Japan all hitting record highs over the period. Much of these global gains came amid expectations the world’s major central banks will cut interest rates at some point this year, a strong rally in technology stocks – particularly those companies exposed to the much-hyped artificial intelligence space – and increasing expectations the US can avoid a recession. The local market also benefited from good gains across the broader commodities complex and a modest uptick in consumer confidence; though confidence remains subdued overall. Limiting the advance was a series of mixed domestic earnings results and disappointing fourth quarter growth, with the economy shrinking 0.1% in the three months to 31 December. This follows the 0.3% contraction we saw in the previous quarter and means the economy entered a ‘technical recession’, which is widely defined as two consecutive quarters of negative growth. Meanwhile, the Reserve Bank of New Zealand (RBNZ) met just once over the period; the Bank leaving the official cash rate on hold at 5.50% in February. In its post-meeting statement, the RBNZ noted that core inflation and most measures of inflation expectations have fallen, and the risks to the inflation outlook have become more balanced. However, at 4.7%, annual headline inflation remains above the Bank’s 1-3% target band, limiting its ability to tolerate upside inflation surprises. [Note: the RBNZ left rates on hold at 5.50% following its early April meeting.] At the sector level, consumer staples and information technology recorded the biggest gains, while communication services and industrials were both weaker.
Australian shares
Australian shares made good gains over the period, returning 5.4%6 . Much of the gains came toward the end of the quarter after the Reserve Bank of Australia (RBA) adopted a slightly less hawkish stance on interest rates following its March gathering. In its post-meeting statement, the RBA reiterated that whilst inflation continues to moderate, it remains high and it will likely be some time yet before it’s sustainably within the Bank’s 2-3% target range. However, the market looked past these comments and focused instead on a subtle change in the statement’s concluding paragraph; namely the path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out. It was only in February that the Bank said the path of interest rates that will best ensure inflation returns to target in a reasonable timeframe would depend upon the data and the evolving assessment of risks, and that a further increase in interest rates could not be ruled out. In response, the market moved to fully price in a first RBA rate cut in September while putting the odds of a follow up move in December at 50%. Stocks also benefited from a series of surprisingly robust earnings results and a strong lead from major overseas markets.
Global listed property
Global listed property edged slightly higher in the first quarter, returning a modest 0.2%7 in hedged NZD terms. Property stocks, like the broader equity market, continued to be influenced in large part by the outlook for global interest rates. Investors were also encouraged by a series of better-than-expected US earnings results and increasing expectations the US can avoid a recession. Limiting the market’s gains were higher long-term government bond yields. At the regional level, Japan, Australia and emerging markets performed well, while Asia ex Japan, the UK, North America and Continental Europe were weaker. In terms of sectors, Japanese developers recorded strong gains, while US specialty and storage names were amongst the worst performers.
Global listed infrastructure
The global listed infrastructure market made good gains over the period, returning 3.0%8 in hedged NZD terms. Listed infrastructure stocks benefited in part from increasing expectations the US economy can achieve a ‘soft landing’, with higher growth and more cyclical areas of the market amongst the best performers; namely energy infrastructure and electric utilities. In contrast, more defensive and interest rate-sensitive sectors tended to struggle, including water utilities. In terms of regions, North America posted the biggest gains for the quarter, followed by Continental Europe and the UK. Asia ex Japan, Australia, Japan and emerging markets underperformed the broader market.
Global fixed income
Global bonds were flat for the quarter, returning 0.0%9 in hedged NZD terms. Longer-term government bond yields rose (prices fell) over the period as investors dialled back their US rate cut expectations. In contrast, bonds benefited from their traditionally defensive qualities amid heightened geopolitical risks. Credit markets were stronger, with spreads on US and European investment-grade and high-yield debt narrowing in what was a largely ‘risk on’ market environment. Hard currency emerging markets debt made good gains, while local currency emerging markets debt underperformed.
New Zealand fixed income
The New Zealand bond market made only modest gains over the period, returning 0.3%10 . Domestic long-term government bond yields rose in sympathy with their global counterparts as investors positioned for ‘higher for longer’ US interest rates. Meanwhile, bonds continued to benefit from their traditionally defensive characteristics in the face of heightened geopolitical uncertainty. The yield on New Zealand 10-year government debt closed the quarter 22 basis points higher at 4.5400%. Local credit markets were weaker, with spreads slightly wider over the period.
New Zealand dollar
The New Zealand Trade-Weighted Index11 fell 2.9% over the quarter, driven largely by general US dollar (USD) strength; the greenback rising as investors wound back their Fed rate cut expectations. The USD also benefited from its traditional ‘safe haven’ qualities amid heightened tensions in the Middle East. The NZD was further impacted by the RBNZ’s less hawkish commentary on inflation following its latest policy meeting. The local currency fell 5.5% against the USD, 4.7% against the British pound, 3.2% against the euro and 1.1% against the Australian dollar. It rose 1.0% against the Japanese yen.
^ Russell Global Large Cap Index until 30 September 2018, MSCI ACWI Index ‒ Net thereafter
Note: All returns in local currencies unless otherwise stated
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1Tokyo Stock Exchange Tokyo Price Index (TOPIX)
2 Dow Jones EuroStoxx 50 Price Index
3Shanghai Shenzhen CSI 300 Index
4 FTSE 100 Index
5S&P/NZX 50 Index with imputation credits
6S&P/ASX 300 Accumulation Index
7 FTSE EPRA/NAREIT Developed Real Estate Index Net NZD Hedged
8S&P Global Infrastructure Index (NZD hedged)
9Bloomberg Global Aggregate Index – $NZ Hedged
10Bloomberg NZ Bond Composite 0+ Yr Index
11 The trade-weighted index for the NZD is an indicator of movements in the average value of the NZD against the currencies of our major trading partners.