Insights
Market Review for February 24
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US market
US stock markets added to 2024 gains over February and have now experienced the best winning streak in 35 years, up 15 out of the last 17 weeks. Equity market index returns for the month were led by a 5.2% gain for the US, while Trans-Tasman markets were more muted, with Australia up 0.2% and New Zealand market down 1.1%. At the same time bond markets were sold off as interest rates continued to trend higher over February. Overall, all our funds experienced solid gains, except for the Green Bond Fund and the Property Fund, which were lower given their sensitivity to higher interest rates.
Strong US market outperformance is once again due to technology stocks. Market darling Nvidia, up 77% in 2024 alone, silenced the critics that said it had reached its peak, after releasing a result that beat Wall Street expectations for earnings and sales. The chipmaker announced that revenue during the current quarter would be better than expected, predicting a whopping US$24 billion in sales as total revenue rose 265% from a year ago. This is thanks to strong demand for their market-leading artificial intelligence chips.
Trans-Tasman market
The lack of technology sector exposure in Trans-Tasman markets explains some of our local market underperformance. However, pockets of Australasian tech have sustained increases similar to the US, with some of our top stocks such as data centre business NextDC and accounting software provider Xero doing well. NextDC (our second largest holding in Australasia, behind Infratil) surged to all-time highs at the end of February as it announced robust growth. Like Nvidia, Next DC provides exposure to the explosion of AI. Management reiterated expectations for 2024 to deliver record contract wins due to cloud computing and AI demand.
New Zealand market
For the New Zealand market to improve, we believe investors need to gain confidence that interest rates are coming down. As mentioned last month, our view is that another interest rate hike is not required, and the bite from higher interest rates is being felt across multiple sectors of our economy. Thankfully, the Reserve Bank agreed and left the OCR (Official Cash Rate) unchanged at 5.50% in February with a less hawkish outlook than feared.
The Reserve Bank reiterated that the OCR needs to remain restrictive "for a sustained period of time" but described the risks to inflation as "more balanced" compared to November. Interestingly, there are now real signs that the rate of mortgage stress is increasing, with non-performing house loans up by over 10% in the past month and the non-performing loan ratio hitting a 10 year high at 0.5%, albeit remaining well below the 1.2% experienced during the Global Financial Crisis. Looking ahead, we continue to expect the Reserve Bank to keep the OCR on hold before starting a gradual easing cycle later this year.
Political developments
Finally, we are also watching US political developments closely given the Presidential election later this year. Donald Trump has effectively trounced Nikki Haley, wining on her home turf, and remarkably is now the betting favourite to win the Presidential election. In terms of policy, Trump is once again talking up the prospect of tax cuts and tariffs. We are also analysing the energy sector ramifications around the Inflation Reduction Act - an act that provides favourable government incentives and tax breaks for clean energy projects, currently supporting some solar and wind companies in our portfolio. But on a positive note, many “red states” such as Arizona and Texas have been major beneficiaries of the Inflation Reduction Act due to massive solar projects in these states, so its potentially unlikely the Republicans will want to unwind this benefit.
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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