Q2: 30 June 2023
Central banks maintained their laser-like focus on combatting inflation by raising interest rates globally during the quarter.
With the Eurozone and New Zealand economies already in a mild recession and other regions facing a lower growth outlook, at least in the near term, share markets were not burdened by high expectations.
However, with plenty of bad news having already been factored into share prices last year, it was pleasing to see international developed share markets still perform strongly over the quarter. Leading the way were several mega-cap US technology firms identified as potential beneficiaries of any greater movement towards increased utilisation of artificial intelligence.
Although share market returns across Australasia and the emerging markets were less significant, these regions also contributed positively to investor returns during the quarter.
With global interest rates again rising, particularly in the UK and Australia, where inflation pressures were proving harder to dampen, the overall returns from global bonds were fairly flat.
When the US Federal Reserve announced they were pausing their interest rate hiking programme in June, it provided a tangible and important sign, to end the quarter, that the global fight against inflation was making positive progress.
+7.5% (hedged to NZD)
US and Eurozone share markets made good gains in the second quarter, with most of these gains coming in June.
Information technology companies benefitted from investor excitement about future applications for artificial intelligence, and several technology and semiconductor companies saw their prices appreciate strongly.
Although both regions raised interest rates during the quarter, the greater resilience of the US economy encouraged the Federal Reserve to pause their hiking programme in June – an encouraging sign for equity markets.
The UK share market was weaker over the quarter. Higher than-expected core inflation data resulting from strong job and wage growth figures suggested the Bank of England still had work to do to get on top of inflation on a sustainable basis. This led to a reacceleration in interest rate hikes for the UK, which presented a clear headwind for the domestic UK share market.
Against major currencies, the New Zealand dollar was a little weaker through the quarter, which meant increased reported returns for investors holding unhedged foreign assets.
The MSCI World ex-Australia Index delivered a healthy return of +7.5% for the quarter hedged to the NZ dollar and +9.0% for the unhedged index.
Source: MSCI World ex-Australia Index (net div.)
Emerging markets shares
Emerging markets posted a small positive return over the second quarter, rising +1.0% in US dollar terms.
The Chinese share market was a significant contributor to the lower returns. The anticipated economic rebound following China’s reopening after the Covid-19 crisis began to falter, driving Chinese shares sharply lower.
Hungary, Poland and Greece were the top-performing emerging markets in USD terms despite rising recessionary fears in Europe. Brazil was also a top performer as optimism about potential interest rate cuts and better-than-expected first-quarter growth figures led to solid gains in Brazil’s Bovespa Index.
Indian shares also performed well, driven by foreign inflows and steady earnings, as encouraging economic data boosted sentiment towards the country.
Despite China’s weakness, the emerging markets group contributed positively, and the slightly weaker New Zealand dollar over the quarter meant the MSCI Emerging Markets Index produced a quarterly return of +2.9% in unhedged New Zealand dollar terms.
Source: MSCI Emerging Markets Index (gross div.)
New Zealand shares
As measured by the S&P/NZX 50 Index, the New Zealand share market eked out a small positive return in the second quarter of 2023.
Of the top 50 companies, four, in particular, stood out. Software company Serko Ltd reaffirmed its strong growth projections for next year and soared +56.9% over the quarter. Retirement village operators Arvida Group and Ryman Healthcare gained +38.0% and +25.3%, respectively, with Arvida announcing a record profit this year and Ryman projecting a lift in net profits of 20-30% next year. Fletcher Building rounded out the notable performers, advancing +24.3% on the back of improved overall news flow.
However, it wasn’t such a memorable quarter for all New Zealand companies. Pharmaceutical supplier Ebos Group saw its share price slump -21.0% following news that the Chemist Warehouse would not renew a $1.9 billion supply contract when it expires next June. While a2 Milk shares drifted -14.3%, following further weakness in Chinese infant formula demand.
Source: S&P/NZX 50 Index (gross with imputation credits)
The Australian share market (S&P/ASX 200 Total Return Index) registered a slight gain in the second quarter, advancing +1.0% in Australian dollar terms.
Although numerous micro-cap basic materials firms and technology companies posted stellar gains during the quarter, these had a negligible impact on the market performance, much more heavily influenced by the results of the big banking companies and the mega-cap essential materials firms BHP and Rio Tinto.
With BHP and Rio Tinto down -4.7% and -4.5%, respectively, on the back of ongoing weakness in iron ore and industrial metals prices, this was a major factor in the subdued performance of the index.
The major banks performed a little better on average, as two further increases in the Australian cash rate during the quarter were seen as positive for bank lending margins and profitability. ANZ Group led the banking cohort gaining +6.9%, with the Commonwealth Bank (+2.0%) and Westpac (+1.8%) also recording gains.
While the local Australian index only recorded a small gain, the slightly weaker New Zealand dollar meant that reported returns to unhedged New Zealand investors improved to +2.6% over the quarter.
Source: S&P/ASX 200 Index (total return)
International fixed interest
The second quarter of 2023 saw a significant drop in bond market volatility.
Government bond yields were generally on the rise again, although there was some divergence. UK and Australian bonds underperformed their peers due to reporting higher-than-expected inflation figures and a renewed resolve by these central banks to combat inflation.
With the exception of the Bank of Japan, all major central banks kept raising interest rates over the quarter. However, the US Federal Reserve was the first to pause in June, leaving short-term US interest rates at 5%-5.25% after more than a year of consecutive rate increases.
With US growth surprising to the upside and a ‘soft landing’ scenario now being the market consensus, US corporate bonds outperformed US government bonds.
Over the quarter, the US 10-year bond yield increased from 3.47% to 3.84%, with the two-year bond yield moving from 4.04% to 4.90%, marking a further inversion of the US yield curve. Germany’s ten-year bond yield rose more sedately from 2.30% to 2.39%, while the UK’s 10-year yield jumped from 3.49% to 4.39% due to disappointing inflation figures.
The FTSE World Government Bond Index 1-5 Years (hedged to NZD) returned -0.2% for the quarter, while the broader Bloomberg Global Aggregate Bond Index (hedged to NZD) gained +0.1%.
Source: FTSE World Government Bond Index 1-5 Years (hedged to NZD)
New Zealand fixed interest
Consistent with overseas trends, on 24 May, the Reserve Bank of New Zealand (RBNZ) raised the Official Cash Rate (OCR) by a further 0.25% to a level of 5.50%.
In the accompanying monetary policy statement, the RBNZ noted that “inflation is expected to continue to decline from its peak and with its measures of inflation expectations. However, core inflation pressures will remain until capacity constraints ease further. While employment is above its maximum sustainable level, there are signs of labour shortages easing and vacancies declining.”
New Zealand government bond yields rose during the quarter, with the New Zealand 10-year bond yield increasing from 4.23% to 4.65% by 30 June. With better-than-expected economic and company news helping ease investor concerns, New Zealand corporate bonds outperformed government bonds over the period.
The S&P/NZX A-Grade, Corporate Bond Index, rose +0.4% for the quarter, while the longer duration but higher quality S&P/NZX NZ Government Bond Index fell -1.6%.
Source: S&P/NZX A-Grade Corporate Bond Index
18 July 2023
Article provided by Consilium.
Disclaimer: Information as at 18 July 2023. This article is general information and does not consider your financial situation or goals and does not constitute personalised advice. Please contact your financial adviser for advice specific to your situation. There are no warranties, expressed or implied, regarding the accuracy or completeness of any information included as part of this article.