What investors should watch over the next three months
This year has started very strongly for share investors, with returns in the March quarter much better than many would have expected. World shares rose 7.8 per cent and, as was the case in 2023, the US and Japan led the charge.
The S&P 500 in the US gained 10.2 per cent for the quarter, surpassing its 2022 high and finishing March almost 30 per cent above its October lows.
It was a remarkable run, with the S&P 500 rising for 16 out of 18 weeks for the first time since 1971. Optimism over developments in AI was again a major driver of the gains, with star performer Nvidia surging another 82.5 per cent over the quarter.
In Japan, the Nikkei 225 rallied a staggering 20.6 per cent, its strongest quarter since 2009.
Other international sharemarkets were up more modestly, while a weaker NZ dollar boosted returns even further.
The currency fell below US$0.60 for the first time since November and also declined against the British pound, euro and Australian dollar.
New Zealand assets lagged, with the NZX 50 sharemarket index rising 2.8 per cent and corporate bonds posting a marginal gain.
As was the case in 2023, welldiversified investors with a global mindset have been handsomely rewarded.
The economic story has been one of further resilience, with several indicators pointing to solid activity and supporting the case for a soft landing.
The US has continued to impress, while Europe has been better than expected and Chinese purchasing managers’ indices rebounded to a 10-month high in March.
In contrast, the New Zealand economy has continued to disappoint, contracting in four of the past five quarters despite very strong population growth.
On the inflation front, it’s been a case of two steps forward, one step back.
Pricing pressures have eased in all regions, and in the US and Europe annual inflation is below 3 per cent.
However, we’re seeing evidence this last mile of the inflation battle might be more difficult.
The Swiss National Bank became the first major central bank to cut interest rates this cycle last month, and the Bank of Japan hiked rates for the first time since 2007.
Central banks will remain a focal point in the months ahead, with interest rate cuts on the horizon but the timing difficult to pick.
The European Central Bank could be next; June is shaping up as an opportune time.
The US Federal Reserve shouldn’t be far behind, but that could be a story for the third quarter rather than the second.
Here in New Zealand, the economy is likely to keep struggling over the next quarter or two.
The Reserve Bank hasn’t hiked the Official Cash Rate (OCR) since May last year, but for many households the headwinds will grow, not subside.
More than half of our collective mortgages are due to reprice within the next year, and the average rate people are paying is still about 1 per cent below current rates.
Our sharemarket doesn’t mirror the economy particularly well, so a tough backdrop doesn’t necessary mean bad news for our listed companies.
The NZX is dominated by stable, mature businesses in sectors like electricity, infrastructure, healthcare and real estate.
Weaker activity increases the chance of OCR cuts (and markets see the first of those coming in August), which should benefit companies in those industries.
While world shares are at a record high, New Zealand share prices ended March 19.1 per cent below their early 2021 peak.
Rising interest rates haven’t been kind to our market in recent times, but we’ll have our time in the sun again.
Don’t forget that in the decade leading up to 2020 New Zealand shares outpaced their international counterparts on seven out of 10 occasions. The next important test for financial markets could be the US corporate reporting season, which starts next week.
For the 2024 calendar year, the S&P 500 index is expected to deliver revenue growth of 5 per cent and earnings growth of 11 per cent.
The bar for avoiding disappointment moves higher as share prices rise, so if we’re going to see a sell-off in the months ahead there’s every chance it comes on the back of weaker earnings or softer guidance.
Looking beyond the next three months and into 2025, inflation is expected to keep trending down and interest rates will almost certainly be lower than they are today.
If economic activity remains resilient, that’s not a bad environment for growth assets, not to mention fixed income.
A bit of weakness wouldn’t be a bad thing, as it might offer an attractive entry point for investors and another opportunity to put some fresh capital to work.
Mark Lister is investment director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision Craigs Investment Partners recommends you contact an investment adviser.