Insights
Market commentary for 2024 and the year ahead
Financial analysis on the global and local markets from our investment team
"A little optimism goes a long way" John Berry
What an extraordinary year for the markets that 2024 turned out to be. The Pathfinder KiwiSaver Plan funds ended the year up 15.8%, 13.4% and 7.1%, for Growth, Balanced and Conservative respectively. Markets saw significant volatility as they navigated two assassination attempts on President Trump, escalating risk of regional war in the Middle East, the Assad regime being overthrown in Syria, Putin threatening nukes, political turmoil in the UK, France, Germany and Canada, a quasi-coup in South Korea and an unwind in the ‘carry trade' (see jargon buster 1) with Japan. With inflation cooling around the globe central banks kept cutting interest rates, corporate earnings kept rising and stocks moved higher.
AI taking the biggest byte of the 2024 market
As we entered 2024, one technology theme that looked set to dominate was artificial intelligence. By August ChatGPT stated it was servicing over 200 million weekly active users with many more providers entering the fray with Meta’s Llama, Google’s Gemini, Anthropic, Perplexity and X-AI all carving out a slice of the AI pie. AI chip maker Nvidia dominated stock market returns with their revenue accelerating from US$61 to $130 billion last financial year. And they are expected to keep growing to almost US$200 billion over the 2026 financial year. Nvidia’s stock price rose more than 170% adding over $2 trillion in market capitalisation (see jargon buster 2). This year we expect the market focus to shift towards companies beginning to monetise AI such as Microsoft, SalesForce, HubSpot and Adobe (which are included in our portfolio).
US election impact on markets
The last quarter of the year saw the increasingly likely return of President Trump confirmed, along with a sweep in the House and Senate, giving the returning leader of the largest economy in the world a broad mandate. The initial reaction was positive for markets. The rally (see jargon buster 3) was concentrated in sectors set to benefit through Trump's policies and corporate activity. Cryptocurrencies also surged. Less favourable from a Pathfinder point of view is the challenge likely to face green energy stocks, with Enphase and FirstSolar down 37% and 26% respectively. Meanwhile, Elon Musk enjoyed a 59% surge in the value of the Tesla stock price due to investors being optimistic that policies under Trump would be beneficial to his business interests.
After the election, the initial market rally faded as the Fed signalled caution, suggesting that a potential Trump administration could lead to stronger growth and higher inflation. Whilst the US market continued to rally, with the S&P500 (see jargon buster 4) climbing 2.1% in the last quarter of year (see jargon buster 5), this was roughly 3% below highs seen in early December. To give this context the MSCI Developed and World Indices came in at -1.2% and -0.4% respectively and Japan was a standout at +5.2%. Overall, the economy looks to stand strong and benefit from ongoing US industrial policy and a healthier domestic economy.
International and local markets: The last quarter and looking ahead
The last quarter saw China’s Shanghai Composite Index staying flat reflecting the ongoing economic unease and lack of meaningful stimulus measures. The Reserve Bank of Australia remained wary of sticky inflation and strong employment, holding rates higher than most other developed nations. This resulted in flat returns.
The NZ dollar fell 11% versus the US dollar, lifting returns for NZ based investors of foreign holdings, after being flat over the first nine months. The fall was due to clear differences in monetary policy - the US economy is strong, signalling higher rates whilst the NZ economy is deteriorating and faces a difficult climb back to growth. The Reserve Bank of NZ has signalled continued interest rate cuts as the Government continues their cost cutting initiatives. Recent NZ Government projections show they will need to borrow an additional $20 billion over the next four years so it’s likely they will maintain a cautious approach to spending and fiscal policy. Our view is that lower rates will feed through to housing and lift confidence gradually through 2025, although more so in the second half of 2025.
Jargon Buster
1. Carry Trade: A carry trade involves borrowing at a low interest rate and investing in an asset that provides a higher rate of return. A carry trade is typically based on borrowing in a low-interest rate currency, such as the Japanese Yen, and converting the borrowed amount into another currency that offers a higher interest rate. The proceeds can also be deployed into assets for an additional yield such as bonds, equities or commodities. The "unwind" we refer to was initially triggered by an interest rate hike by the Bank of Japan (which meant the interest rate for borrowing Yen was higher & less attractive) which caused traders to all sell at once, and market moves were exacerbated.
2. Market capitalisation, or 'market cap', is the total value of a company’s outstanding shares of stock. It is calculated by multiplying the current share price by the total number of shares. For example, if a company has 1 million shares and each share is worth $50, the market capitalisation would be $50 million (1 million x $50). Market capitalisation is used to assess the size of a company and is often used by investors to categorize companies as small-cap, mid-cap, large-cap or mega cap based on their market value. For example, a 'mega cap' has a market capitalisation of over $200 billion.
3. Rally: A rally refers to a period of sustained increases in the price of an asset, such as stocks, bonds, or commodities. It often happens after a downturn or a period of weakness in the market. A rally indicates a broad or strong rise in prices, usually driven by positive news, strong earnings reports, or investor optimism.
4. S&P500 or 'Standard & Poor's 500' is a stock market index that tracks the performance of 500 large, publicly traded companies in the United States. It's one of the most commonly used proxies for the performance of the overall U.S. stock market and is considered a good indicator of the health of the U.S. economy.
5. Last quarter refers to the months 1 October to 31 December 2024
Performance
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Michael joined us in 2023 after being a Portfolio Manager at Mint Asset Management and prior to that at Salt Funds Management. He also spent three years as an Investment Analyst in Peru working for a Philanthropic fund and has worked for Goldman Sachs and JBWere after graduating with 1st Class Honours from Auckland University (BCom Hons Finance and Economic). Michael is a CFA Charterholder.
