Insights
Market Review for June 24
Update on markets for June from our investment team
"Much needed relief - interest rate cuts could be coming from the RBNZ sooner than expected " Hamesh Sharma
It was a buoyant month for markets to round out the first half of the year. The US market added 3.2% in June, extending the S&P 500 index to a 16% gain for the year. US stock market performance has been driven by the mega-cap names with Nvidia, Apple & Microsoft racing to be the world’s most valuable company.
Locally it was slightly different story with Australia up 0.8% and New Zealand down 1.3% over the month. The divergence in performance is quite apparent, with the ASX up 3% year to date, while the NZX is down 0.3%. In contrast to the broader market, our Trans-Tasman Fund had another solid month, up 2%, in part given our exposures to software and datacenter companies.
Global Markets
The US economy has proved more robust than expected which is why the market has been expecting interest rates to stay higher for longer. Some signs of weakness are starting to emerge. Job openings have returned to pre-covid levels and job growth data is consistently being revised downward. Retail spend data has softened, and a key measure of industrial activity from The Institute for Supply Management showed much weaker than expected results on employment, new orders and activity levels. This could be the summer slowdown on the back of higher interest rates starting to hurt the US economy, so we eagerly await further economic data points.
As touched on in John's intro, politics remains a hot topic. With over two-billion people voting in democratic elections this year, political changes are impacting countries worldwide. The UK experienced a historic and sweeping landslide victory for the Labour Party, while Macron's bet of a surprise election flopped and the new government appears fragile. Post a lacklustre debate performance for President Bidens polls are suggesting Trump is in the lead for the US election in November.
In terms of central bank moves, the interest rate cutting cycle has started for some. Canada has cut, and so has the European Central Bank albeit they are still scared of inflation. Is the Bank of England next - markets there are pricing a 62% chance for the August meeting.
Trans-Tasman Markets
The Reserve Bank of Australia (RBA) is standing out because there's a 24% chance they might raise interest rates in August. At its last meeting, the RBA left the cash rate unchanged at 4.35% which everyone expected, but they sounded more cautious about the future. RBA Governor Bullock highlighted the near-term path for interest rates was 'not obvious' and reiterated the Board was 'not ruling anything in or out', and clearly looking to maintain optionality.
In New Zealand we have seen weak data including a soft Budget. The Quarterly Survey of Business Opinion showing weak confidence, hiring and pricing intentions which are all disinflationary, and 10% of firms showing they will cut staff. Economic growth (GDP) rose 0.2% in the 1st quarter of 2024 compared to the prior quarter adjusting for inflation. When we think about population growth it appears growth per person has gone backwards to levels similar to the Global Financial Crisis.
However, we saw a positive sign this week when the Reserve Bank announced that restrictive monetary policy has significantly reduced consumer price inflation and we could see RBNZ making in rate cuts as soon as next month rather than later this year or early next year.
Contact Energy
Ending on a more positive note, one of our NZ holdings that has performed well this year is Contact Energy. Contact Energy is working hard to mitigate its contribution to climate change with its large investment in new renewable energy generation plants (geothermal and wind). Although Contact still has two remaining fossil fuelled generation plants, they are used only when demand conditions make it necessary to preserve electrical grid supply to customers. In addition, Contact plans to phase these plants out by 2025. It's for these reasons that we've granted Contact Energy an exception, as it otherwise breaches our fossil fuel exclusion. We believe the work it's doing to transform the energy sector for better is worth backing.
New Zealand can expect to see an 81% increase in demand for electricity under favourable economic conditions by 2050 according to a recent Ministry of Business, Innovation and Employment report. Contact is a quality operator in this growing sector with a solid track record. They are capturing the whole value chain from generation to electricity retailing and are well positioned to benefit from increased demand through improved wholesale pricing with high-cost baseload thermal generation.
Contact Energy’s shares are up 10% so far this year, well ahead of the broader NZX market return which is flat this year to date
Find out more
Find out more about our investing in renewable energy.
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