Insights
Market Review for March
US stocks see best winning streak in 35 years, Australian and NZ markets more muted
Equity market index returns ended the quarter on a high note, with the US market notching a 2.9% gain for March, Australia up 2.6% and New Zealand up 3.1%. This resulted in all our equity funds up between 2.8% to 4.5% for the month.
US market
Following what has been a record run for the US, the market, took a breather last week and bonds were sold off (as interest rates moved higher). A combination of robust US economic data points and higher than expected inflation figures saw US market rates move higher. A strong US labour market suggests the economy remains resilient and intensified the debate about when the Federal Reserve might begin to ease monetary policy and interest rates. US jobs increased by 303,000 in March, easily beating consensus estimates, while the unemployment rate edged down to 3.8% from 3.9% in February.
The US March core consumer price index (inflation data), which excludes food and energy costs, increased 0.4% from February playing into our view that interest rates will stay higher for longer. It is now widely regarded that June rate cut now looks to be off the table. Market pricing has moved from three 0.25% rate cuts this year to one or two 0.25% cuts compared to the six to seven cuts that were expected at the start of the year.
The next focus for US markets will be first quarter earnings with some of the banks such as JP Morgan already releasing uninspiring updates. Given the ongoing resilience of the US economy, it will be interesting to see how this translates into corporate profitability.
European market
In Europe, the economy is not as strong as the US. The European Central Bank (ECB) kept its word and held rates steady at 4.0% at its March meeting. President Lagarde reiterated the ECB's intention to cut rates at the upcoming June meeting. It's worth noting that the market is largely aligned with the ECB's stance, with an 88% probability of a rate cut priced in for the meeting. Also of note, the Swiss National Bank became the first major developed central bank to ease policy, surprising the market with a 0.25% cut in its policy rate to 1.5%. To put this in context, Swiss core inflation is at 1.1%, significantly below other markets, so they have room to cut interest rates.
NZ market
The Reserve Bank of New Zealand (RBNZ) held its cash rate at 5.5%, as expected. The big news nationally was that ongoing NZ economic weakness was confirmed by GDP data, with a per capita recession (growth adjusted for population) now extending to five quarters in a row up until the end of 2023.
This supports our view of an OCR reduction later this year as NZ economic growth is markedly underperforming compared to our key trading partners. There are many signs that cash rates are impacting the NZ economy, with the latest Quarterly Survey of Business Opinion highlighting a rapid rebalancing of supply and demand – one that promises more disinflation ahead. Applications per job ad ratio is trending higher consistent with very low employment growth and an increase in the unemployment rate.
Building cost inflation has slowed to its lowest level in eight years, as liquidations also rise. The latest Cordell Construction Cost Index recorded a 0.5% increase in the first quarter of the year, less than half the long-term quarterly average of 1.1%. The annual change of 2.3% was well down on the peak of 10.4% recorded in the September quarter last year and is now at the lowest rate in almost eight years. The not-so-fun fact is that since 2018, the average New Zealander has seen their purchasing power go backwards by 19.4%.
One of our key sector bets in NZ is overweight retirement stocks (~10% of the fund). Arvida released an encouraging update for the sector last week commenting on the outlook that while commentators have broadly pointed to house prices stabilising over the next 12 months, they have already started to see an increase in retirement village settlement activity.
“Applications have consistently been above levels experienced in previous years and are up more than 20% on last year…Into the new financial year, there is good momentum with almost 40% of resales inventory at March end sold”.
Historically markets move both up and down before an economy turns. The fact that we are in a recession has already been factored into stock prices nationally. It would not take too much to positively surprise, across some NZ industries, such as retirement, for these NZ stocks to rebound.
Jargon buster
Equity market index - A stock market index tracks the ups and downs of a chosen group of stocks or other assets. Watching the performance of a market index provides a quick way to see the health of the stock market, guides financial firms in the creation of index funds and exchange-traded funds (ETFs), and helps you gauge the performance of your investments.
First quarter earnings - the first financial quarter is generally regarded as 1 April until 30 June. The earnings refer to profits made during this quarter.
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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.
