Our quarterly update from the Lighthouse team
Quarterly Update
Global equity markets bounced higher again in the June quarter. This was in part due to continued evidence of inflation easing, but mainly because larger tech stocks rallied on the prospect that they will see another surge in profitability as machine learning and related ‘AI’ algorithms are integrated into their core products and services.
International shares rallied strongly, by around 7.5% in the June quarter, but elsewhere performances were more subdued. Australian and emerging market equities and global listed property increased a little over 1%, NZ equities rose around 0.5%, while bonds were flat to slightly decline, as was global infrastructure.
Over the year to June, performances are very strong for most equity markets, with global equities in NZD terms leading the pack being up 22%. This gain more than offset the decline over 2022. However, in part this reflects that the NZ dollar also plummeted over 2022, and has not bounced back nearly as much. On a local currency basis global equities are still slightly below the peak levels they had at the end of 2021.
In contrast to global equites, NZ equities are still around 11% lower than their 2021 peak levels. Bonds have a similar amount of ground to recover given the large declines they suffered in 2022. The good news in this regard is that with cash yields now around 6% for investment grade funds, and with inflation trending lower we can expect this ground to be made up over the next year or two assuming that the macroeconomic picture evolves broadly in line with what is expected.
Reading the tea leaves
There is now little doubt that inflation rates and economic activity are declining both in New Zealand and globally. This is welcome news for central bankers trying to return inflation back to target levels, but cold comfort for almost everyone else. The key question is whether they have done enough?
Bond markets seem to think so. Yield curves are inverted, meaning that short-term interest rates are higher than expectations of future short-term rates. This is shown in New Zealand, which is expected to be amongst the first countries to start cutting. Interest rates in one year’s time are expected to be around 0.5% lower, and in 5 years over 1% lower. But bond markets, like macroeconomists, are not great at forecasting. Although inflation is coming down, ‘core’ inflation rates are still too high for central banks to declare victory just yet, and hence interest rates may need to stay higher for longer. Time will tell.
There is plenty to be concerned about geopolitically but to end on a potentially positive note, artificial intelligence (‘AI’) does present a large potential upside to economic growth and productivity levels. Goldman Sachs estimates that AI could lift global productivity by 15% over the next decade – a simply enormous gain. While we should treat these estimates with a healthy grain of salt, it is also worth remembering that ultimately productivity is most of what propels living standards and equity markets higher. As uncomfortable as they are at the time, interest rate cycles and most other ‘shocks’ just cause blips along the way.
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James Blair
Wealth Director
+64 27 399 5175
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The information in this article is general information only, is provided free of charge and does not constitute professional advice. We try to keep the information up to date. However, to the fullest extent permitted by law, we disclaim all warranties, express or implied, in relation to this article – including (without limitation) warranties as to accuracy, completeness and fitness for any particular purpose. Please seek independent advice before acting on any information in this article.
