Commentary on the June quarter by Russell Investments, UniSaver’s investment consultant and manager

Global markets

Global share markets made modest gains in the June quarter, with the MSCI ACWI Index ‒ Net returning 1.0% in unhedged New Zealand dollar (NZD) terms. Much of the gains continued to be driven by central bank activity. In the US, the Federal Reserve (Fed) left its benchmark fed funds rate on hold at a target range of between 5.25% and 5.50% throughout the period. Speaking after the Bank’s latest (June) gathering, Chairman Jerome Powell said that while inflation has eased considerably from its peak, it nonetheless remains too high, and that policymakers don’t yet have the confidence to begin lowering interest rates. However, Powell did reaffirm his belief that current monetary policy is sufficiently restrictive to achieve the Bank’s inflation goal. The Fed also signalled that it expects to cut interest rates just once this year; two less than it projected back in March. Encouragingly, the latest inflation figures showed an easing in consumer prices between April and May. At the time of writing, the market was fully priced for a first Fed rate cut in November. Elsewhere, the European Central Bank cut interest rates in early June; the Bank lowering its main refinancing rate by 0.25% (to 4.25%) after what President Christine Lagarde called a marked improvement in the region’s inflation outlook. Meantime, both the Bank of England and the Bank of Japan left their respective benchmark policy rates unchanged. Share markets also benefited from a series of mostly positive corporate updates and strong performances across the ‘Magnificent 7’.

At the country level, the benchmark US S&P 500 Index (3.9%) and the tech-heavy NASDAQ Composite (8.3%) made good gains for the quarter, while the Dow Jones Industrial Average (-1.7%) slipped. Stocks were also higher in the UK (2.7%[1]) and Japan (1.5%[2]) but fell in Europe (-3.7%[3]) and China (-2.1%[4]).

New Zealand shares

New Zealand shares underperformed their global counterparts in the second quarter; the local market returning -3.1%[5]. Much of the decline was driven by a combination of earnings downgrades and a series of softer-than-expected domestic economic data; though we did see signs that business confidence is beginning to rise. Meanwhile, the Reserve Bank of New Zealand (RBNZ) left the official cash rate on hold at 5.50% throughout the period but warned that interest rates may need to stay higher for longer. At the sector level, consumer discretionary and materials recorded by far the biggest declines over the period, while information technology and the traditionally defensive consumer staples space made relatively strong gains.

Global alternatives

Global listed property fell in the second quarter, returning -1.8%[6] in hedged NZD terms. Contributing to the decline were higher long-term government bond yields; particularly in the US, where the yield on 10-year Treasuries rose in response to the Fed signalling fewer interest rate cuts this year. At the regional level, North America posted the biggest decline for the quarter, followed by emerging markets, Australia and Asia ex Japan. Japan and the UK were also weaker, while Continental Europe performed relatively well. In terms of sectors, US industrial, lodging and office names were amongst the worst performers, while US healthcare and residential stocks outperformed.

The global listed infrastructure market made good gains over the period, returning 2.5%[7] in hedged NZD terms. Much of the advance was driven by strong gains in the US, which comprises a large part of the overall market.

Fixed income

Global bonds edged slightly higher for the quarter, returning 0.1%[8] in hedged NZD terms. Longer-term government bond yields rose (prices fell) over the period as investors continued to assess the outlook for interest rates. More broadly, bonds benefited from their traditionally defensive qualities in the face of ongoing geopolitical risks; particularly in the Middle East. Credit markets were weaker, with spreads on US and European investment-grade and high-yield debt wider for the quarter.

The New Zealand bond market made modest gains over the period, returning 0.8%[9]. Domestic long-term government bond yields rose in sympathy with their global counterparts. However, bonds continued to benefit from their traditionally defensive characteristics amid heightened geopolitical uncertainty. The yield on New Zealand 10-year government debt closed the quarter 13 basis points higher at 4.67%.

How did markets affect UniSaver’s investment options?

Strong gains from global equity markets combined with lower inflation numbers delivered solid returns for all member options. Over the last year the Conservative option has returned 5.1%, Balanced 8.1% and Growth 10.3% after the deduction of fees and tax. The Cash option delivered a 4.4% return over the same period.

Over the last ten years the Conservative, Balanced and Growth options have returned 3.4%, 5.5% and 7.0% per annum respectively, after the deduction of fees and tax.

Looking ahead

Public equity valuation multiples are expensive, particularly in the United States, and corporate credit spreads are tight. Rich valuations dampen the outlook for risk assets. Government bonds, by contrast, look attractively priced with U.S. Treasury yields continuing to trade well above expected inflation.

The global business cycle outlook has brightened over the quarter with the U.S. economy coming back into better balance, early signs of a positive inflection in the global manufacturing cycle which could benefit Europe, and improving return on equity as a result of recent structural reforms in Japan. While we think it is more likely than not that the U.S. can avoid a recession in 2024, uncertainty is still elevated, and markets have priced in all, if not more than all, the positive news in recent months.

The New Zealand economy has been under more pressure than Australia, in large part because the Reserve Bank of New Zealand (RNBZ) tightened monetary policy more aggressively. The positive signs are that business confidence has been rising and the RBNZ has signaled the hiking cycle is likely finished.

[1] FTSE 100 Index

[2] Tokyo Stock Exchange Tokyo Price Index (TOPIX)

[3] Dow Jones EuroStoxx 50 Price Index

[4] Shanghai Shenzhen CSI 300 Index

[5] S&P/NZX 50 Index with imputation credits

[6] FTSE EPRA/NAREIT Developed Real Estate Index Net NZD Hedged

[7] S&P Global Infrastructure Index (NZD hedged)

[8] Bloomberg Global Aggregate Index – $NZ Hedged

[9] Bloomberg NZ Bond Composite 0+ Yr Index