Quarterly market update
Overview of investment markets for the quarter ended 30 September 2024 from our investment manager, Mercer. All returns in the following commentary are in local currency terms, unless stated otherwise.
Market summary
Interest rate cuts were the talk-of-the-town during Q3 as most major global economies began their easing cycles, including New Zealand, the US and major Eurozone players.
July was coined “the great rotation” for equities and jumpstarted a trend which continued throughout the quarter as markets turned their focus to small caps and value-style sectors, with funds starting to flow out of mega-caps and into interest-rate sensitive asset classes. Such activity was influenced by a growing hope for an economic soft landing and underwhelming quarterly earnings reports from the "Magnificent 7" in July.
Japanese stocks dropped -4.9% following the Bank of Japan's July rate hike and comments from Governor Ueda suggesting more increases ahead, coinciding with a weak US labour market report. As interest rate differentials between the US and Japan decreased, the yen strengthened, leading to a rapid unwinding of carry trades that depended on low Japanese borrowing costs. Although a more positive tone from Bank of Japan officials helped mitigate some losses, the market still finished the third quarter down. In contrast, European equity returns were modest, with MSCI UK and MSCI Europe indices1 gaining 3.4% and 2.1%, respectively (local currency), while the S&P 500 rose 5.9%, indicating a potential broadening of returns for equity investors.
Fixed income markets experienced a boost from the anticipation of lower interest rates, with the Bloomberg Global Aggregate Index (NZD Hedged2) posting a return of 7.0% in the third quarter. Both government bonds and credit instruments generated strong returns, while emerging market debt surged by 6.1% during the quarter, positioning it near the top of the performance rankings for fixed income sectors year-to-date.
Sector commentaries
This chart shows the returns of various market indices for periods ending 30 September 2024. Key: NZE New Zealand equities; AE Australian equities; GE Global equities (local currency); GENZD Global equities (NZ dollars); EME Emerging market equities local currency; GP Global property hedged; GLI Global listed infrastructure; NZB New Zealand bonds; GB Global bonds aggregate hedged; C New Zealand cash; FC Foreign currency effect. The foreign currency effect is the difference between the unhedged and hedged overseas share returns.
Trans-Tasman equities
New Zealand equities (+6.4%) bounced back this quarter, outperforming developed market equities after the Reserve Bank of New Zealand initiated monetary policy easing. Across the Tasman, the Reserve Bank of Australia has yet to make any rate cuts, but at its September meeting, it refrained from discussing the possibility of a rate hike, which is new and points towards a change in outlook. The S&P/ASX 200 rose by 7.2% in September, also outperforming many major developed markets, as the Australian materials sector benefited indirectly from the late-month stimulus package announced by China.
Global equities
US shares advanced in the quarter, though sector performances were mixed. While utilities and real estate thrived, energy and information technology lagged. Eurozone shares also gained, led by real estate, utilities, and healthcare, as lower interest rates attracted investors. UK equities rose following a Labour election win, boosting hopes for economic recovery and expectations of a Bank of England interest rate cut, which occurred in August. The Japanese stock market experienced high volatility, peaking in July before correcting sharply due to weaker US economic data and the Bank of Japan's interest rate hike, which strengthened the yen against the US dollar. Emerging market equities outperformed developed markets, rebounding strongly in September after initial volatility and a Bank of Japan rate hike. The MSCI World Index returned 4.7% in Q3, while the MSCI Emerging Markets Index returned 6.6%.
Property & listed infrastructure
Global Real Estate Investment Trusts returned an impressive 13.7% during the quarter, while listed infrastructure assets returned 12.0%. The industrial sector continues to support returns due to retailers and a strong consumer base, while office space remains a laggard. However, the outlook for global real estate performance is becoming more positive, bolstered by gradual policy adjustments and increasing rental rates.
NZ bonds and cash
Performance in the September quarter was primarily driven by a dovish shift from the Reserve Bank of New Zealand (RBNZ) and other global central banks. The short end of the curve experienced a more pronounced decline as the market anticipates a more aggressive easing cycle ahead. A total of 135bps in cuts is now expected over the three RBNZ meetings leading up to February. The domestic bond market, represented by the Bloomberg NZ Bond Composite 0+ Yr Index, delivered a return of 3.9% during the quarter.
Global bonds
Changes in investor expectations regarding interest rates contributed to a strong performance in government bonds. US Treasuries decreased significantly throughout the quarter, falling -1.01%bps (local currency). While UK Gilts3 also lagged with a return of -1.57% (local currency). The tight labour market in the UK is leading to consistently high wage growth, prompting the Bank of England to adopt a more cautious approach regarding the speed of future easing measures. The Bloomberg Global Aggregate Index (NZD Hedged) returned 7.0% in the third quarter of 2024.
1An index is a ‘basket’ of securities, the changes in value of which are designed to represent the movements of a particular market or market sector. An example is the Morgan Stanley Capital International World Index (MSCI World) for international equities.
2Currency hedging is a tool used to remove the potential loss arising from movements in foreign exchange rates. When overseas investments are hedged, returns are broadly in line with the underlying market or local currency return.
3A UK Gilt is a UK government bond that is a low-risk investment that provides a steady income stream.
This information has been prepared by Mercer (N.Z.) Limited (Mercer) for general information only. The information does not take into account your personal objectives, financial situation or needs. Before making any investment decision, you should take financial advice as to whether your intended action is appropriate in light of your particular investment needs, objectives and financial circumstances. Neither Mercer nor any related party accepts any responsibility for any inaccuracy. Past performance is no guarantee or indicator of future performance.