Members Only: Our Quarterly Update – February 2024

Market trends took an interesting turn once again, with a strong rally observed throughout the December quarter. This positive momentum was widespread, benefiting various investment categories, such as global and domestic stocks, fixed income markets, listed property, infrastructure, and even cash and short-term bonds. Notably, the rally was fueled by a shift in the perspective on interest rates, as there was a reversal in the belief that keeping rates high was crucial to curb inflation. Instead, with a decline in CPI inflation in the US and globally, markets anticipated rate cuts in 2024, leading to what is known as a ‘soft landing’ scenario where the reduction in inflation isn’t expected to trigger a global economic downturn.

The US economy stood out as a bright spot in this period. On the flip side, recent GDP data from New Zealand indicated a mild recession for much of 2023. Chinese growth, while positive, hit multi-decade lows, and concerns persist due to elevated debt levels incurred for residential and infrastructure spending.

European growth faced challenges as well, with Germany experiencing a mild recession in 2023. The variations in macroeconomic conditions influenced the strength of the equity rally, with US stocks outperforming most other markets. Overall, these market dynamics have important implications for your investment portfolio.

The moment Bloomberg terminals signaled negative interest rates during the 2009 Global Financial Crisis (GFC) marked a significant shift. Interest rates, both short and long-term, stayed exceptionally low, even turning negative, until early 2021. In New Zealand, the official cash rate averaged just above 2% from 2008 to 2019, dropping to near zero in response to the pandemic in 2020.

The prolonged low rates were a response to central banks’ concern about deflation, as high debt levels in modern economies make them vulnerable to deflation’s impact on debt servicing costs. Central banks, more accustomed to handling high inflation, kept rates low to avoid widespread debt defaults and economic depression.

This extended period of low rates led to inflated asset prices, as markets and households assumed these rates were the new normal. However, as inflation surged past 5% in 2022 and 2023, rates and expectations rose, causing marked-to-market bond losses in 2022. Equities and other listed assets also adjusted to higher interest rates.

The positive aspect of this adjustment is the removal of the looming threat of significant rate hikes over asset prices. With bond and dividend yields at higher levels, reliance on volatile capital gains for portfolio returns diminishes.

The great reset may not be entirely over, especially in residential property markets where the math doesn’t align for investors. The enduring legacy of the low-interest rate period could potentially be a long-term stagnation in house prices, akin to Japan’s experience in the early 1990s after its bubble burst.

James Blair
Wealth Director
+64 27 399 5175