Insights
Market Review for July 24
Navigating the markets journey through July
July saw the Australian and New Zealand markets perform exceptionally well, with positive gains driven by optimism about upcoming interest rate cuts. In contrast, US markets showed mixed results. This mixed global performance, coupled with easing inflation and predicted rate adjustments, suggests a pivotal moment for investment strategies. For those considering reallocating assets, particularly from term deposits into managed funds, now could be an opportune time to capitalise on emerging opportunities in sectors like property and retirement stocks. Let’s dive in….
Overview
July saw the S&P500 (made up of largest 500 companies in the United States) up 1.2% after a month of fluctuations. US investors are seeing uninspiring quarterly returns, and we are noticing a rotation of investment out of technology stocks and into the broader market, particularly small companies (more on the rotation dynamic below).
The Australian and New Zealand markets made gains of 4.2% and 5.9% respectively during July on the prospect of lower interest rates. The Reserve Bank of New Zealand (RBNZ) caught a number of economists off guard as they cut the OCR by 0.25% at their latest meeting due to a struggling NZ economy and signs that inflation is under control. During the June quarter, annualised local inflation decreased to 3.3% (from 4.0% in the previous quarter), a trend we are seeing globally. While there are still hotspots like rates, insurance and elevated electricity prices, most other sectors see inflationary pressures ease. This is welcome news for the cost-of-living crisis, and there has been some relief for borrowers as mortgage rates finally start to drop. However, it is still clear that the NZ economy is doing it tough with reduced consumer buying power, multiple business closures and job losses. Real time economic indicators are falling fast, and we would argue that the RBNZ has done the right thing, acting faster given the lagged effects of monetary policy.
The US market
The latest US Federal Reserve meeting noted that the US job market is stable, and inflation risks are now more balanced due to signs of economic weakness. This led investors to expect interest rate cuts sooner. As a result, the Russell 2000 index, which tracks smaller US companies, rose as investors bought shares in these smaller firms, which benefit from lower interest rates. At the same time, investors started selling off shares in big tech companies, which had been doing very well. The Nasdaq Technology index is still up 13% this year, so some pullback was expected after a strong rally.
Earnings Season has begun in the US, meaning investors are paying close attention to companies' quarterly profit reports. So far, the markets have been volatile during this period. The banking sector had a strong start with Morgan Stanley reporting excellent trading profits and Goldman Sachs and JP Morgan also exceeded expectations. However, we are clearly seeing the consumer is under pressure: Netflix was down, Tesla sales are slowing and big fast-food giants like Dominos Pizza and McDonalds’ earnings plummeted showing a clear trend in reduced consumer consumption.
Technology stocks: July was volatile for technology stocks, which have rallied strongly this year, so the bar of market expectations was high.
Apple shares took a hit saying growth would be steady during the July-September period after reporting iPhone sales globally were strong but Chinese sales were much weaker than expected.
Amazon released below estimated results and said consumers are exercising more caution (a common theme right now) with their spending in favor of lower-priced goods.
Intel (a chipmaker) suffered their worst fall in over 24 years and announced it would cut more than 15% of its workforce and suspend its dividend.
Trans-Tasman market
New Zealand's strong market performance stood out in July because many of its sectors—such as electricity, utilities, real estate, and telecommunications—rely heavily on income and benefit from lower interest rates which started to come down due to expected interest rate cuts.
Retirement Sector: Retirement stocks were one of the biggest beneficiaries to the prospect of lower interest rates. Oceania Healthcare rebounded 47% as the market gained confidence that we’re currently at the bottom of the housing cycle and it’s set to turn upwards. The retirement sector has been trading at depressed levels which saw Arvida Group receive a takeover offer at a 65% premium to its stock price. We continue to have a large allocation to the sector in the NZ part of our portfolios and given the debate on interest rates has turned from 'up or down' to 'how fast and how far down' we are comfortable with this allocation.
Performance
Keep up to date with our performance here.
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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.
