Investment market commentary for the month ended 31 March 2024

Financial markets were strong over the month of March, with international equities returning 3.2%, and fully NZD hedged international bonds gaining 0.9%. Markets pushed higher following the US Federal Reserve’s (the Fed) policy meeting mid-month. As widely anticipated, the Fed held interest rates steady for the fifth consecutive meeting. The market however, reacted positively to the Fed’s unadjusted expectation of 3 interest rate cuts later in the year, despite a recent uptick in inflation. This rally saw the leading markets in the US, the S&P 500 Index, and the Nasdaq Composite, hit new record highs.

Other share markets around the world also experienced strong returns. In Europe, markets gained as dovish signs from central banks encouraged a risk-on sentiment. Economic data also supported the push higher, as inflation continues to come off in the UK, decelerating from 4.0% in January to 3.4% in February, the lowest reading in more than 2 years. It wasn’t all positive news however, with confirmation that the UK entered a technical recession in the December 2023 quarter.

The Bank of Japan lifted interest rates for the first time in 17 years, seeing an end to its negative interest rate policy era that was established to fight chronic deflation. However, as accompanying comments reinforced, any removal of stimulus will be gradual, the move resulted in a weaker yen, strength in the share market and lower bond yields.

Looking at global equities from a sector perspective, the volatile energy sector was one of the leaders over March, as oil prices jumped on modestly better Chinese economic data and concerns over an escalation in tensions between Israel and Iran. While the technology sector lagged behind other sectors in March, it is still the best-performing sector so far in 2024.

Closer to home, the New Zealand economy, as expected, fell into technical recession. GDP in the December 2023 quarter fell 0.1%, marking a contraction in 4 out of the last 5 quarters. High inflation and interest rates continue to be a handbrake on the economy, which has seen a number of businesses struggle. Despite this, the domestic share market performed in line with its global counterparts and returned 3.1% over March.

After the strong start to the year for financial markets, especially international equities, the main challenge for investors is the now broad consensus that the benign macroeconomic conditions that have helped to drive these returns, will continue. While this does not necessarily suggest an impending equity market sell-off, and indeed equities could well continue rising, it does create a vulnerability should negative surprises arise. As such, we are comfortable maintaining a modestly cautious stance in the MAS Funds.

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