Insights
Market Review for September 24
In-depth analysis on the global and local markets from our investment team.
Overview
The 2024 market upturn continued in September, as the US S&P notched a 1.8% gain for the month despite rising geopolitical risks. In terms of local market moves, the Australian market gained 2.2% for the month on the back of positive China sentiment, with the mining sector surging on the news of Chinese stimulus. The New Zealand market contracted 0.2% over September but it has already rebounded strongly so far this month as The Reserve Bank cut the OCR by another 0.50%.
The end of the September quarter should give investors cause for optimism, but it’s balanced by a very large dose of uncertainty. The slow, hard grind out of recession for New Zealand will likely continue. The economy is making incremental gains and consumer sentiment is gradually improving, but Kiwis have done it tough for the last two years and there’s no quick fixes in sight.
The practical effect, when adjusted for record migration, is that New Zealand has been in a rolling recession for the last two years and consumers and businesses are continuing to hurt. Our economy has struggled more than many of our peers from abroad and will continue to face tough trading conditions over the next 12 months. But there are promising signs of a small bounce - despite our economic challenges the NZX50 index is performing well, up 6% over the last quarter, and business confidence has finally turned the corner with a positive turn at the end of the quarter post the start of The Reserve Bank’s rate cuts.
Global market sentiment remains remarkably robust, especially given geopolitical tensions in the Middle East and one of the tightest and most polarising US elections in recent memory.
Global markets
Core economic data shows that the United States may just have managed to pull off a perfect – and unprecedented soft landing. Employment data is positive; there is a clear trajectory for further rate cuts; and inflation appears to have almost been brought into the target band without prolonged levels of economic suffering.
But there are clear risks present. The 5 November US presidential election may have significant implications for global trade, inflation, and geopolitics. There is already a view that many sectors of the US economy are now in pause mode, awaiting the result and deferring significant capital expenditure, hiring or investment decisions until there is better clarity around policy. At the same time, there is the deteriorating conflict between Israel and Iran. Aside from the massive human tragedy of this war, the conflict has every potential to derail the global recovery via reignited inflation.
So far, global markets have proved resilient to this conflict, but the fourth quarter promises to be a cautious close to the year as investors question the resolution of Middle East conflict and the US election. It will be a matter of balancing the opportunities for a recovering global economy against the fragility of that recovery.
One economy that has been stronger and more resilient than expected is Australia. Their share market enjoyed particularly strong support for mining stocks in September on expectations that Chinese demand will improve as they reset their economy with a stimulus package of rate cuts and credit expansion. Although Pathfinder doesn’t hold Australian mining stocks, we expect this to have a positive flow on effect for the wider Australian economy, and therefore our Australian holdings which all our managed funds have some exposure too.
Our overall view of the global economy and investment environment is net positive. While overshadowed by significant geopolitical uncertainty and the potential for volatility well into next year, global economic fundamentals are improving in major economies, and inflation appears controlled by most central banks.
Trans-Tasman market
As touched on above, the prospect of lower interest rates has seen some enthusiasm return to New Zealand markets.
Inflation, which is currently at 3.3%, is expected to fall within the 1% to 3% target range soon. We think the time gap over the Christmas break, soft economic conditions and retreating inflation increase the likelihood The Reserve Bank could opt for a larger rate cut before year-end. A 50bp cut in November would bring the total rate cuts to 125 basis points for 2024.
The September ANZ Business Confidence Survey showed a 20% increase in confidence (from 50.6 to 60.9). 45% of businesses are feeling more optimistic about their own prospects – the highest level seen in a decade – and inflation expectations remain just inside the RBNZ target band (steady from the last survey at 2.92%). Our view is that a recovery in business confidence, combined with a decent rate cut before Christmas, could provide the much-needed stimulus we need to drive a significant improvement in New Zealand’s economic performance in 2025.
With the stock market rising during the September quarter, it has now moved ahead of where our domestic economy is performing. Investors in sectors such as retirement companies and real estate are experiencing a big bounce in value as lower interest rate prospects enhance their financial position and points to better growth prospects. We have recently bought into Winton on the NZX, giving us exposure to a high-quality property developer - as we believe the residential property market has bottomed. Additionally, we have exposure to the retirement sector in our Global Property Fund and Ethical Trans-Tasman Fund.
The US election - a 'make or break' moment
Whatever the outcome of the US election, there will be global implications. These range from a potential 10% tariff imposition on all imports promoted in the Trump campaign while the Harris campaign is committed to a 10% lift in corporate tax rate. There will likely be a lot for the business community and investors to adjust too.
The incoming president will also inherit an increasingly divided and partisan world, with a minefield of geopolitics to navigate including: a grinding Russia-Ukraine war, a rapidly evolving Middle East conflict, and a tense relationship with China. Both presidential candidates represent, to varying degrees, the US’s continuing drift towards more protectionist policy. This is particularly relevant for US-based manufacturing and automotive industries, and this will continue to impact trade, international relations, and global economics.
The Centre for Strategic and International Studies recently published a comprehensive paper ‘The Global Impact of the 2024 US Presidential Election’ that assesses the various implications of the election result for Europe, Africa, Asia, the Middle East and the Americas. The report notes that many are viewing this election as a ‘make or break moment’ for the global economy, trade, geopolitics, and international conventions, concluding that “there could not be a more consequential moment for the US to be choosing its next leader."
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