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Investment Update June 2024

After a turbulent June for the US economy, with inflation showing signs of calming down but consumer spending declining, investors are faced with a market that is filled with both careful optimism and persistent worries. This month's update examines the most recent economic and legislative news to assist you in navigating this complex investing landscape.


American Economy

There has been news of economic concern in the United States amid signs of low unemployment and a high number of job openings. Here’s a summary of what’s going on:

  • The Good – The job market is strong, with a relatively higher proportion of job openings compared to the number of unemployed people. Wages are also rising, with average hourly earnings significantly higher than pre-pandemic.

  • The Bad – Inflation is stubborn. It’s currently moving very slowly towards the Fed’s target of 2%. On a consumer level, people believe inflation will rise, which is leading to reduced spending in areas such as retail.

  • The Ugly – Debt levels are rising, along with delinquency rates. This rise in debt could lead to less spending and borrowing, which could end in an overall economic slowdown.



Other news of note is that Nvidia has now crossed US$3 trillion in market capitalisation. It joins a club consisting of only 2 other companies that have exceeded this threshold: Apple and Microsoft. Nvidia alone has accounted for about 1/3 of the 13% that the S&P has gained so far this year.


Investors are now confident that Nvidia's stock price rise is because the company is doing well financially, not just because everyone else is buying. Nvidia has been releasing new products and their earnings keep beating expectations. Analysts are upgrading their price targets, with Bank of America predicting a 30% increase. The upcoming stock split will make the share price more attractive to everyday investors.


However, there are still some risks. The future of artificial intelligence, which is driving Nvidia's growth, is uncertain. Also, competitors like Intel are developing new chips to challenge Nvidia.


The rise of artificial intelligence (AI) is creating opportunities for companies beyond the core AI developers. Companies like Hewlett-Packard (HP) and Crowdstrike are seeing a surge in investor interest and stock price due to their involvement in AI-related services. HP's AI-optimized services revenue doubled to US$900 million, and Crowdstrike is benefiting from the increased demand for AI-powered cybersecurity solutions. This suggests that the AI boom is having a ripple effect across the tech industry.


What this means for you as an investor is that you should be happy to stay invested in the markets. While things are slowing down, overall, the American economy is doing better; the good news is better than the bad news.


Our recommendation is to stay invested. Cash is still providing a good return, especially in the short term, however, we expect interest rates to come down in the medium to long term, and that’s reflected in the 2-3 year bond market.


Yield Curve


The above graph is a yield curve, and can be used to predict interest rate changes and the resulting economic movement.


The above curve is an example of an inverted yield curve, as it has a downward slope. These types of curves usually indicate an economic recession as bond yields go down.


In terms of the situation in New Zealand, you can see that the 10-year rate is lower than the short-term rate. This puts emphasis on short term borrowing.


This curve is subject to change when interest rates change. If interest rates do fall, you can expect lending rates to also come down.


 

Lending update


We caught up with Adrian, our mortgage specialist, for an update based on recent events.


You can watch the full interview below:



Here are the key points he mentioned:

  • 1st of July is a key date

  • The bright-line test is being reduced to 2 years. If you bought an investment property prior to July 2022, you are no longer subject to tax on any capital gains, should you decide to sell.

  • The Reserve Bank will be implementing the new Loan to Value (LVR) and Debt to Income (DTI) rules. Starting with Debt to Income ratio, first home buyers will now be able to borrow up to 6x their income, and investors will be able to borrow up to 7x their income. In terms of Loan to Value ratio, investors will now only need a 30% deposit to invest in a rental property.


  • The scrapping of the First Home Grant is unlikely to make a difference to the overall property market.

  • Tax relief might not be enough to stimulate the economy.

  • Headline inflation is at 4%. This is composed of 1.6% tradable inflation, and 5.8% non-tradable inflation. Tradable inflation is the price increase of goods and services influenced by international markets (e.g., oil). Non-tradable inflation refers to price increases not influenced by international markets (e.g., rent, price of a haircut).

  • Property is going through the normal winter slowdown. Investors currently make up 20% of the market, the highest since March of 2021. Banks are still keen to lend to first home buyers. There can also be differences between advertised rates and the real rates banks are offering. It’s important to get in touch with a mortgage broker and mortgage adviser to ensure you’re getting the best rate.


 

Market update

Here's a summary of New Zealand's economic and business news for the past month:


Budget announcement:


The National lead government has announced the budget for 2024. It included a focus on infrastructure spending, social housing, and tax relief. While the housing market might see a slowdown due to scrapped first-home buyer grants, infrastructure investment could benefit construction companies. Overall economic growth is predicted to pick up in the latter half of 2024, potentially improving business conditions. However, investors should be aware of potential headwinds like rising costs and a slowdown in global trade.


Housing Market:


The housing market has stalled nationwide, with asking prices dropping and more houses on the market compared to last year. Wellington seems to be particularly affected, with prices dipping slightly.


Economic Concerns:


The rising cost of living is forcing some people to find creative solutions, like taking on flatmates or homestay students.


Lower global oil prices might provide some relief at the pump but could create a headache for the Reserve Bank of New Zealand as they manage inflation.


Business:


Company Struggles: Dairy giant Synlait Milk is facing challenges, with over half its suppliers wanting to leave and a downgraded earnings outlook. They've also scrapped an asset sale.


Business Defaults: Business defaults and liquidations are on the rise due to the challenging economic environment.


Overall:


The economic news in New Zealand seems mixed. While the housing market is cooling down, some businesses are facing difficulties. Rising costs and a challenging global environment might be putting pressure on the economy.


 

Staff Update


Trilogy is pleased to welcome Jerome, our new paraplanner. He is highly passionate about investing and is excited to be providing excellent service to Trilogy’s clients.


Jerome brings a unique skillset to the team. He graduated from the University of Auckland with a degree in computer science and has also worked as a digital marketer and graphic designer. He has since also completed his New Zealand Certificate in Financial Services (Level 5) (Investment).


Aside from starting a new job, he’s also starting a new role as a father, with his partner having recently given birth to their beautiful daughter.


 

Please keep in touch


A friendly reminder to check you've made enough contributions to your KiwiSaver (at least $1,042.86) by 15th of June to ensure you get the maximum government contribution ($521.43). If there's a shortfall, please make sure you credit your KiwiSaver account accordingly. If you need any information about this, please get in touch with us.


If you have any queries or concerns about your financial, investment, and retirement planning matters, please feel free to give our office a call on 09 553 8928 or email us at info@trilogyfs.co.nz.

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