Investment Update May 2024

Market update

New Zealand’s inflation rose 0.6% in the March 2024 quarter. This was in line with consensus, as was the annual rate of 4.0%, which was lower than the December 2023 4.7% annual reading.

In its April policy update the RBNZ observed “near-term price pressures remain”. As expected, the RBNZ maintained the Official Cash Rate (OCR) at 5.5%. The Bank retained its guidance noting that ‘the Committee is confident that maintaining the OCR at a restrictive level for a sustained period will return consumer price inflation to within the 1 to 3 percent target range this calendar year.’ The RBNZ’s forecasts imply the OCR will be held steady for the rest of 2024 and the first interest rate cut is likely to be in the first half of 2025. After a period of stabilising, several measures of domestic economic activity have weakened in recent weeks.

Fixed income presents attractive yields with the potential for capital gains from anticipated interest rate declines. Longer-term interest rates are forecasted to decline over the next twelve months as inflation eases and central banks begin rate reductions.

The commencement of the US first quarter corporate earnings season added to market volatility, yet the results have generally surpassed forecasts. Notably, there is evidence of expanding earnings growth beyond large-cap tech stocks, with companies like General Motors, Goldman Sachs, and Colgate-Palmolive showing strong performance.

Within the dominant tech sector, known as the Magnificent Seven (Amazon, Apple, Meta Platforms, Microsoft, Alphabet, Nvidia, and Tesla), there have been varied results. Tesla and Apple struggled, while Meta's shares fell due to underwhelming revenue and high capital expenditure concerns related to its AI strategy. Conversely, Microsoft and Alphabet delivered positive surprises, with Alphabet's stock surging 10% to a record high, valuing it over $2 trillion. Amazon also exceeded expectations. Overall, US big tech is meeting market expectations.

In May, market rallies saw the Nasdaq reach an all-time high of 16,511, surpassing April's record. The S&P 500 and the Dow Jones Industrial Average approached their previous closing highs from March 28.

Today, the Dow reached 40,051.05, the culmination of a bull market that began in October 2022. The index had neared the 40,000 mark earlier this year before a slight April pullback on worries about high interest rates knocked it back down. The rally was rekindled in May on the back of strong earnings and some soft inflation readings.

The Dow’s rally toward 40,000 comes as expectations of interest rate cuts and enthusiasm around artificial intelligence boost investor sentiment. The market is expecting the first Federal Reserve rate cut in September. That expectation grew after a smaller-than-expected increase in consumer prices for April was reported earlier this week.

Meanwhile, the ongoing resilience of the US economy is supportive of US corporate earnings, and global economic activity is stabilising.

The Fed has been holding its key overnight borrowing rate in a targeted range of 5.25%-5.5%. Though the rate has been there since July, it is the highest level in some 23 years.

In the US, as the year progresses companies outside of the Magnificent Seven will make an increasing contribution to market earnings growth. This leads to the prospect of a broader group of companies supporting the market. Risks remain around the US recession and ongoing geo-political risks. These are areas for ongoing monitoring. Fixed income offers an attractive yield with the potential for capital gains from declines in interest rates.

Important tips

With the changing season, it's a great time to reassess your financial matters. Here are some tips to ensure your finances are in good shape:

• Don’t miss out on your KiwiSaver Government Contributions (invest before 15 June) - if you are aged 18 to 64 and in KiwiSaver, the Government will contribute 50 cents for every dollar you contribute to your KiwiSaver account, up to a maximum of $521.43 each year. The Government contribution is calculated based on your employee and voluntary contributions between 1 July to 30 June each year and is paid directly into your KiwiSaver account (usually by the end of August).
  

• Tax considerations – Taxes can significantly impact your investment returns. if your tax marginal tax rate is 33% or 39% it may be prudent to discuss your investment options to cap your tax rate at 28% for your investment income. 

• Time in the market is better than trying to time the market. Attempting to time the market consistently is pointless.

• The psychological benefits of staying invested - Investing can be an emotionally taxing experience, especially during periods of market turbulence. Staying invested helps investors overcome the common behavioural biases, such as fear and greed, that can lead to poor investment decisions. A well-structured investment strategy with a focus on long-term goals can help investors weather market storms with confidence.

• Diversification reduces risk- We believe that diversification is a cornerstone of prudent investing. By spreading investments across various asset classes, sectors, and themes, we can reduce the risk associated with market segments. Staying invested enables the maintenance of a diversified portfolio, which acts as a protective shield during market volatility.