Insights
Market Review for January
Interest rate cuts stalled, US tech stocks continue to soar
The momentum from late 2023 has continued, with the US S&P 500 index currently trading at all-time highs. Equity market index returns for January were +1.5% for the US, +1.2% for Australia and +0.9% for New Zealand. This was reflected in a positive return for our core Global & Trans-Tasman equity funds, although the Global Property and Global Water funds were slightly lower over the month. Our Global Green Bond Fund also gave back some of its recent gains as interest rates have trended higher over the start of 2024.
This has led some in the market, including our investment team, to wonder if economic growth is too strong for the interest rate cut that has been widely talked about and expected. The latest US GDP (economy) growth for 2023 was 3.1% vs 0.7% a year earlier, driven by a resilient US consumer and government spend. The pace of growth is expected to slow, but economists have consistently been revising their forecasts upward. Company earnings are ultimately what drives the market direction, and so far, earning updates have been robust.
As a result of these robust earnings (in most sectors), we have seen the probability of an interest rate cut by the US Federal Reserve in March reduced. Across the Tasman, the Reserve Bank of Australia also left the cash rate on hold at 4.35% and signalled no cuts are coming soon.
Locally, we have seen a stark reversal in expectations when it comes to the next move by the Reserve Bank of New Zealand. Late last year the market was pricing in a reduction in the Official Cash Rate (OCR) by mid-year. Now, several major bank economists and the interest rate markets are pricing in chances of another increase in the OCR. This has come on the back of hawkish* remarks from the Reserve Bank Chief Economist around the NZ economy.
The labour market remains tighter than expected, wage growth is easing albeit by less than expected, consumer confidence data is improving, and net migration is at record levels. All these factors point to continued pressure on inflation. And finally, while NZ inflation continues to fall relative to bank economists’ predictions, it’s falling at a rate below what the Reserve Bank forecast. And non-tradables (trades that serve the domestic market rather than being exported, like construction services, real estate, and public services) are not falling at the same rate as global trade.
Despite this interest rate backdrop, equity markets have traded higher as investors have been encouraged by the latest round of quarterly earnings results from US companies. The focus for investors has shifted away from big picture macroeconomic issues to the financial results of companies.
Results from these companies have come from controlling costs - US corporates were generally able to improve profit numbers, despite slower revenue (sales) growth. A good example of this was Meta (formerly Facebook) which soared 20% the day after reporting a threefold rise in fourth-quarter profit and declaring its first dividend. The tech market has continued to lift expectations with AI winners like Nivida growing more than +40% over the last month. But in contrast, Tesla has been an outlier, falling as it announced weak 2024 production and margin guidance. Interestingly, the weakest profit announcements in the US for the quarter came from the energy and materials sectors (e.g.oil, gas, mining), which the Pathfinder funds have very limited exposure to given our ESG exclusions.
Jargon Buster:
What does it mean to be hawkish? Hawks are seen as willing to allow interest rates to rise in order to keep inflation under control, even if it means sacrificing economic growth, consumer spending, and employment.
A hawk can be contrasted with a dove. A dove is an economic policy advisor who promotes monetary policies that usually involve low interest rates. Doves tend to support low interest rates and an expansionary monetary policy because they value indicators like low unemployment over keeping inflation low.
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Hamesh joined Pathfinder in April 2019 and primarily manages Australasian equities. Hamesh has 10 years’ financial markets experience, beginning his career as an analyst in the investment strategy team at Goldman Sachs JBWere, after a summer at the Reserve Bank of New Zealand. Prior to Pathfinder, he co-founded an independent stock market research firm. Hamesh holds a BCom (Hons)/LLB from Auckland University.
