InvestNow Market Wrap-Up: June 2024

Written by Jason Choy, InvestNow Senior Portfolio Manager

Market Dashboard

Global stocks led by the US saw fresh highs in June, while local markets continued their struggles in 2024. The economic momentum of the first quarter continued into the second for global equity markets, which saw gains concentrated in a handful of (AI-related) mega-cap names. Meanwhile, rate sensitive small cap and real estate stocks suffered from confirmation of the higher-for-longer interest rate environment, which at the halfway mark of the year saw markets expect far fewer rate cuts than it did at the start. New Zealand and Australian shares also struggled over Q2, as both Trans-Tasman central banks toyed with the idea of further rate hikes – a far more hawkish sentiment compared to their developed world counterparts.

Global Markets Summary: June 2024

Global share markets continued to surge, finishing both the month and quarter of June higher. In stark contrast to the broader market rally witnessed in the first quarter of 2024, the second quarter’s rally was much narrower, fuelled by a handful of technology names associated with the Artificial Intelligence (AI) theme. While emerging market equities performed in line with global equities over Q2, broader share market performance over the quarter was more mixed, with global small-cap and value stocks finishing the quarter lower. Overall, the MSCI All Country World Index finished the month of June +3.1% higher in unhedged NZ dollar terms and +2.6% in hedged NZ dollar terms, amid NZD weakness.

Global share markets continued to surge in 2024, with a strong second quarter in many developed markets.

US stocks continued their 20-month bull run, with major indices once again notching record highs in June. Over the month, the S&P 500 (+3.6%) and NASDAQ (+6.0%) both surged further to uncharted territory, driven by strong company earnings growth from a handful of mega-cap technology leaders. This included many of the familiar names within the ‘Magnificent Seven’, such as Apple (+10.7%), Tesla (+12%), Amazon (+10.4%), Meta (+9%) and of course NVIDIA (+13.6%), which over June had surpassed US$3 trillion in market cap, and briefly became the most valuable company in the world. With NVIDIA alone responsible for nearly one-third of the S&P 500’s +14.5% rise in the first half of the year, this concentration of leadership amongst a handful of elite names has been a cause for concern for some market watchers.

Global stock performance, particularly over Q2, was dominated by a handful of US mega-cap tech stocks.

The broader Q1 rally has changed significantly over Q2 to reveal a two-speed market dynamic. Analysis from Fisher Funds shows that while economic resilience drove a rally in cyclical sectors (such as banking and energy) in the first three months of the year, which led to a ‘rising tide’ lifting all boats in a broad market rally, this trend has quickly reversed over the second quarter as these same sectors went deep into the red, reflecting the impact of higher-for-longer interest rates starting to bite. Instead, it was really only technology stocks that carried performance over Q2, with just six big tech stocks (NVIDIA, Amazon, Microsoft, Meta, Alphabet and Apple) which make up one-quarter of the index, accounting for over 60% of the S&P 500’s first half gains. The clear haves and have-nots in the corporate sector are obvious when looking at an equal-weighted S&P 500, which actually fell -3.1% over Q2 and is only up +4.1% over the first half of 2024.

On an equal-weighted basis, the average company in the S&P 500 has only gained modestly over 2024.

European share markets were mixed over June despite positive news on the economic front. Eurozone equities faced uncertainty over the quarter caused by political developments in the European elections and dwindling expectations of steep interest rate cuts in 2024. Notwithstanding this, the European Central Bank (ECB) became the latest developed market central bank to kick-start its easing cycle, cutting rates 25 bps to 3.75%. The well-choreographed move from the ECB reflected pockets of economic weakness alongside falling inflation, despite annual inflation ticking up slightly to 2.6% from 2.4% the previous month. The Swiss Central Bank also followed up its initial rate cut last quarter with a second 25 bps cut in June.

UK shares finished June higher as the FTSE 100 achieved fresh all-time highs, amid an even narrower market rally compared to US counterparts. Just six companies (Astra Zeneca, Shell, HSBC, Unilever, Rolls Royce and RELX) made up 99% of the index’s gains for the first half of 2024, of which only RELX can be said to be enjoying the boost from the AI-frenzy. Despite slowing UK growth, including unemployment rising to 4.4% and it being mission accomplished with inflation back to 2% (less than two years after topping at 11.1%), the Bank of England kept interest rates on hold amid concerns that high wage inflation could mean that the fall in UK inflation is only temporary.

It was mission accomplished for the Bank of England, with UK inflation returning back to the 2% target.

Japanese shares continued an upward trend over the quarter, although yen depreciation remains a concern. While Japan’s TOPIX index generated a positive return of +1.7% in local currency terms over Q2, foreign currency-based returns were negative following the continued depreciation of the yen. The yen weakness was driven by the strength of the US dollar, supported by the US’ stronger economy and higher for longer interest rate scenario, with the yen’s fall below 160 vs the USD taking it back to levels last seen in 1986. While the Bank of Japan has expressed concerns about the negative impact of yen weakness on inflation, it remains reluctant to raise interest rates by much. Despite this backdrop, Japanese companies concluded its second quarter full-year earnings season with stronger-than-expected results, which bolstered the local market.

Wider Asian and Emerging markets also saw a solid finish to the June quarter, driven by a cautious return of investors into the Chinese market. This reflected low valuations for many Chinese stocks, as well as increased investor sentiment following moves by Chinese authorities to support the real estate sector. Taiwan, however, was the best-performing index in the region over the second quarter and first half of 2024, fuelled by ongoing investor optimism for stocks expected to gain from the AI-wave. Indian shares also achieved robust growth over the quarter following an investor-friendly Indian election result. Overall, the weight of Asian markets in the broader emerging market universe saw emerging market returns outperform their developed market counterparts over the second quarter.

Global bond markets finished June mixed – while international investment grade bond returns were largely flat over the quarter, suffering from marked-to-market losses in pricing delays to interest rate cuts, short-term credit and high-yield products performed well. Global government bonds diverged over the period, with US Treasury yields peaking close to the beginning of the quarter and trending lower since. Markets also digested another unsurprising hold from the Federal Reserve, with expectations for 2024 rate cuts falling from three at the start of the year to just one now. Overall, this saw the Bloomberg Global Aggregate Index hedged to the NZD returning +0.87% over the month but essentially flat for the quarter.

Key updates for the Kiwi investor:

The New Zealand share market trailed global stocks, declining in June and taking 2024 into the red, with the S&P/NZX 50 Gross Index (with imputation credits) returning -1.2% over the month and -3.1% over the quarter. Only one-third of the NZ share market produced a positive return in June, as lower earnings expectations and weak local economic data dragged down local stocks. This reflects most of NZ’s largest stocks being utility and infrastructure type investments, which are sensitive to NZ economic growth and interest rates. In contrast, the Australian share market gained 1% in June, despite inflation hitting headlines again over the ditch with an unexpectedly high increase of the Australian CPI to 4.0% from 3.6%.

Local bond markets saw a robust positive return in June, with the Bloomberg NZBond Composite 0+ Yr Index returning +1.0% over the month. Over the month, the New Zealand 10-year yield fell 15 bps, ending at 4.7%. While overall, New Zealand investment grade bonds increased +0.7% over the quarter and +5.2% of the year, within government bonds specifically (which are longer duration), the return was only around +4.7% for the year, whilst corporate bonds returned +6.3%.

New Zealand exits a recession again for the second time in 12 months. GDP for the March 2024 quarter rose 0.2%, which was slightly above expectations and 0.2% higher than in the year-ago quarter. The last time NZ saw positive GDP growth over the quarter was in Q2 2023, when it exited its last recession. The (technically positive) economic news this time round was driven by a strong showing from the primary sector as well as a lift in tourism spending.

New Zealand has once again emerged from a recession in Q1 2024, something last achieved in Q2 2023.

Despite emerging from a recession, the economic woes for Kiwi consumers and businesses continue. The Q1 GDP figures saw half of NZ’s 16 industries fall, and the economy still remains smaller than its September 2022 peak. This is despite an explosion in population growth, which has seen GDP per capita hit six consecutive quarters of negative growth. Notably, the -40% decline in NZ corporate earnings since the post-Covid peak in early 2022 to the midway point of 2024 has been larger than the falls seen during the Global Financial Crisis (GFC), which capped out at just 34%.

The decline in NZ corporate earnings since 2022 has been worse than that of the GFC.

Chart of the month:

Octagon highlights the impact on the NZ market has been much more subdued in this monetary tightening cycle compared to the previous cycle during the GFC.

Our Chart of the Month is from Octagon Asset Management, who compares the impact on local markets of the Reserve Bank of New Zealand’s latest monetary tightening cycle versus the previous cycle during the GFC. A common question many New Zealand investment managers have gotten recently is whether the impact of this most recent recession is worse than the one New Zealand faced during the GFC. Octagon addresses this by looking at the performance of key NZ markets (cash, bonds, shares, property and wholesale interest rates) in the months immediately following the RBNZ’s last (peak) interest rate hike.

Octagon’s analysis shows that across the board, the impact of this most recent tightening cycle is much more subdued compared to its GFC counterpart. For example, NZ equities were basically flat during the post-Covid tightening cycle, whereas it faced a -17% drawdown during the GFC. Similarly, Property is only down -4% this time round versus -10% last time. Equally, the mitigating impact of defensive assets like cash and bonds in this cycle are well below their GFC counterparts, which returned a staggering +20% and +32% respectively – yes defensive assets like cash and bonds don’t always have to be boring!

This highlights the benefits of diversifying your investments across a mix of growth and defensive assets. While investors of the past 15 years may have only ever experienced the market’s broader bull run, where investing purely into equities has done well, there is no guarantee that this market cycle will always continue. The traditionally ‘boring’ investments like bonds can and have historically done well – especially during volatile markets – which is particularly helpful given choppy markets are when equities tend to perform poorly. This is why so many of the most popular funds, particularly in KiwiSaver, are diversified funds, which are designed to perform well over a variety of market cycles.

What we’ve been reading:

InvestNow Market Wrap-Up: June 2024

Written by Jason Choy, InvestNow Senior Portfolio Manager

Market Dashboard

Global stocks led by the US saw fresh highs in June, while local markets continued their struggles in 2024. The economic momentum of the first quarter continued into the second for global equity markets, which saw gains concentrated in a handful of (AI-related) mega-cap names. Meanwhile, rate sensitive small cap and real estate stocks suffered from confirmation of the higher-for-longer interest rate environment, which at the halfway mark of the year saw markets expect far fewer rate cuts than it did at the start. New Zealand and Australian shares also struggled over Q2, as both Trans-Tasman central banks toyed with the idea of further rate hikes – a far more hawkish sentiment compared to their developed world counterparts.

Global Markets Summary: June 2024

Global share markets continued to surge, finishing both the month and quarter of June higher. In stark contrast to the broader market rally witnessed in the first quarter of 2024, the second quarter’s rally was much narrower, fuelled by a handful of technology names associated with the Artificial Intelligence (AI) theme. While emerging market equities performed in line with global equities over Q2, broader share market performance over the quarter was more mixed, with global small-cap and value stocks finishing the quarter lower. Overall, the MSCI All Country World Index finished the month of June +3.1% higher in unhedged NZ dollar terms and +2.6% in hedged NZ dollar terms, amid NZD weakness.

Global share markets continued to surge in 2024, with a strong second quarter in many developed markets.

US stocks continued their 20-month bull run, with major indices once again notching record highs in June. Over the month, the S&P 500 (+3.6%) and NASDAQ (+6.0%) both surged further to uncharted territory, driven by strong company earnings growth from a handful of mega-cap technology leaders. This included many of the familiar names within the ‘Magnificent Seven’, such as Apple (+10.7%), Tesla (+12%), Amazon (+10.4%), Meta (+9%) and of course NVIDIA (+13.6%), which over June had surpassed US$3 trillion in market cap, and briefly became the most valuable company in the world. With NVIDIA alone responsible for nearly one-third of the S&P 500’s +14.5% rise in the first half of the year, this concentration of leadership amongst a handful of elite names has been a cause for concern for some market watchers.

Global stock performance, particularly over Q2, was dominated by a handful of US mega-cap tech stocks.

The broader Q1 rally has changed significantly over Q2 to reveal a two-speed market dynamic. Analysis from Fisher Funds shows that while economic resilience drove a rally in cyclical sectors (such as banking and energy) in the first three months of the year, which led to a ‘rising tide’ lifting all boats in a broad market rally, this trend has quickly reversed over the second quarter as these same sectors went deep into the red, reflecting the impact of higher-for-longer interest rates starting to bite. Instead, it was really only technology stocks that carried performance over Q2, with just six big tech stocks (NVIDIA, Amazon, Microsoft, Meta, Alphabet and Apple) which make up one-quarter of the index, accounting for over 60% of the S&P 500’s first half gains. The clear haves and have-nots in the corporate sector are obvious when looking at an equal-weighted S&P 500, which actually fell -3.1% over Q2 and is only up +4.1% over the first half of 2024.

On an equal-weighted basis, the average company in the S&P 500 has only gained modestly over 2024.

European share markets were mixed over June despite positive news on the economic front. Eurozone equities faced uncertainty over the quarter caused by political developments in the European elections and dwindling expectations of steep interest rate cuts in 2024. Notwithstanding this, the European Central Bank (ECB) became the latest developed market central bank to kick-start its easing cycle, cutting rates 25 bps to 3.75%. The well-choreographed move from the ECB reflected pockets of economic weakness alongside falling inflation, despite annual inflation ticking up slightly to 2.6% from 2.4% the previous month. The Swiss Central Bank also followed up its initial rate cut last quarter with a second 25 bps cut in June.

UK shares finished June higher as the FTSE 100 achieved fresh all-time highs, amid an even narrower market rally compared to US counterparts. Just six companies (Astra Zeneca, Shell, HSBC, Unilever, Rolls Royce and RELX) made up 99% of the index’s gains for the first half of 2024, of which only RELX can be said to be enjoying the boost from the AI-frenzy. Despite slowing UK growth, including unemployment rising to 4.4% and it being mission accomplished with inflation back to 2% (less than two years after topping at 11.1%), the Bank of England kept interest rates on hold amid concerns that high wage inflation could mean that the fall in UK inflation is only temporary.

It was mission accomplished for the Bank of England, with UK inflation returning back to the 2% target.

Japanese shares continued an upward trend over the quarter, although yen depreciation remains a concern. While Japan’s TOPIX index generated a positive return of +1.7% in local currency terms over Q2, foreign currency-based returns were negative following the continued depreciation of the yen. The yen weakness was driven by the strength of the US dollar, supported by the US’ stronger economy and higher for longer interest rate scenario, with the yen’s fall below 160 vs the USD taking it back to levels last seen in 1986. While the Bank of Japan has expressed concerns about the negative impact of yen weakness on inflation, it remains reluctant to raise interest rates by much. Despite this backdrop, Japanese companies concluded its second quarter full-year earnings season with stronger-than-expected results, which bolstered the local market.

Wider Asian and Emerging markets also saw a solid finish to the June quarter, driven by a cautious return of investors into the Chinese market. This reflected low valuations for many Chinese stocks, as well as increased investor sentiment following moves by Chinese authorities to support the real estate sector. Taiwan, however, was the best-performing index in the region over the second quarter and first half of 2024, fuelled by ongoing investor optimism for stocks expected to gain from the AI-wave. Indian shares also achieved robust growth over the quarter following an investor-friendly Indian election result. Overall, the weight of Asian markets in the broader emerging market universe saw emerging market returns outperform their developed market counterparts over the second quarter.

Global bond markets finished June mixed – while international investment grade bond returns were largely flat over the quarter, suffering from marked-to-market losses in pricing delays to interest rate cuts, short-term credit and high-yield products performed well. Global government bonds diverged over the period, with US Treasury yields peaking close to the beginning of the quarter and trending lower since. Markets also digested another unsurprising hold from the Federal Reserve, with expectations for 2024 rate cuts falling from three at the start of the year to just one now. Overall, this saw the Bloomberg Global Aggregate Index hedged to the NZD returning +0.87% over the month but essentially flat for the quarter.

Key updates for the Kiwi investor:

The New Zealand share market trailed global stocks, declining in June and taking 2024 into the red, with the S&P/NZX 50 Gross Index (with imputation credits) returning -1.2% over the month and -3.1% over the quarter. Only one-third of the NZ share market produced a positive return in June, as lower earnings expectations and weak local economic data dragged down local stocks. This reflects most of NZ’s largest stocks being utility and infrastructure type investments, which are sensitive to NZ economic growth and interest rates. In contrast, the Australian share market gained 1% in June, despite inflation hitting headlines again over the ditch with an unexpectedly high increase of the Australian CPI to 4.0% from 3.6%.

Local bond markets saw a robust positive return in June, with the Bloomberg NZBond Composite 0+ Yr Index returning +1.0% over the month. Over the month, the New Zealand 10-year yield fell 15 bps, ending at 4.7%. While overall, New Zealand investment grade bonds increased +0.7% over the quarter and +5.2% of the year, within government bonds specifically (which are longer duration), the return was only around +4.7% for the year, whilst corporate bonds returned +6.3%.

New Zealand exits a recession again for the second time in 12 months. GDP for the March 2024 quarter rose 0.2%, which was slightly above expectations and 0.2% higher than in the year-ago quarter. The last time NZ saw positive GDP growth over the quarter was in Q2 2023, when it exited its last recession. The (technically positive) economic news this time round was driven by a strong showing from the primary sector as well as a lift in tourism spending.

New Zealand has once again emerged from a recession in Q1 2024, something last achieved in Q2 2023.

Despite emerging from a recession, the economic woes for Kiwi consumers and businesses continue. The Q1 GDP figures saw half of NZ’s 16 industries fall, and the economy still remains smaller than its September 2022 peak. This is despite an explosion in population growth, which has seen GDP per capita hit six consecutive quarters of negative growth. Notably, the -40% decline in NZ corporate earnings since the post-Covid peak in early 2022 to the midway point of 2024 has been larger than the falls seen during the Global Financial Crisis (GFC), which capped out at just 34%.

The decline in NZ corporate earnings since 2022 has been worse than that of the GFC.

Chart of the month:

Octagon highlights the impact on the NZ market has been much more subdued in this monetary tightening cycle compared to the previous cycle during the GFC.

Our Chart of the Month is from Octagon Asset Management, who compares the impact on local markets of the Reserve Bank of New Zealand’s latest monetary tightening cycle versus the previous cycle during the GFC. A common question many New Zealand investment managers have gotten recently is whether the impact of this most recent recession is worse than the one New Zealand faced during the GFC. Octagon addresses this by looking at the performance of key NZ markets (cash, bonds, shares, property and wholesale interest rates) in the months immediately following the RBNZ’s last (peak) interest rate hike.

Octagon’s analysis shows that across the board, the impact of this most recent tightening cycle is much more subdued compared to its GFC counterpart. For example, NZ equities were basically flat during the post-Covid tightening cycle, whereas it faced a -17% drawdown during the GFC. Similarly, Property is only down -4% this time round versus -10% last time. Equally, the mitigating impact of defensive assets like cash and bonds in this cycle are well below their GFC counterparts, which returned a staggering +20% and +32% respectively – yes defensive assets like cash and bonds don’t always have to be boring!

This highlights the benefits of diversifying your investments across a mix of growth and defensive assets. While investors of the past 15 years may have only ever experienced the market’s broader bull run, where investing purely into equities has done well, there is no guarantee that this market cycle will always continue. The traditionally ‘boring’ investments like bonds can and have historically done well – especially during volatile markets – which is particularly helpful given choppy markets are when equities tend to perform poorly. This is why so many of the most popular funds, particularly in KiwiSaver, are diversified funds, which are designed to perform well over a variety of market cycles.

What we’ve been reading:

 

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