Market Commentary

29 May, 2023

Comments from Harbour Asset Management

Markets continue to be volatile as if they are caught in a “catch-22” – a dilemma from which there is no escape because of mutually conflicting or dependent conditions. If inflation remains high, central banks will have to hold interest rates higher for longer.

However, if the economy slows quickly in response to higher rates, then earnings forecasts may be too high.

Equity investors are increasingly moving their focus from inflation and central banks to the impact of a slower economy on earnings expectations.

In New Zealand, company updates during April were generally in line with or better than expected. Investors added to investment in sectors that may sustain and grow earnings through a period of slower economic growth, which includes shares in the healthcare and tech sectors.

The New Zealand market was led by defensive utility, telecommunication and infrastructure sectors, and the largest company in the New Zealand market, Fisher & Paykel Healthcare.

Globally share markets rallied as investors focused on stronger-than-expected corporate earnings and an easing in bank stress and inflation concerns.

Returns for New Zealand-listed real estate stocks were mixed with a further round of negative independent asset valuations, reflecting higher interest rates and physical property asset transactions.

In contrast, Australian returns were strong with residential real estate shares driving the performance reflecting strong net migration and a pause in Reserve Bank of Australia official interest rate increases.

Ainsley McLaren
Executive Director

Comments from ANZ

US equity markets have been strong recently as hopes of a debt ceiling resolution and some upbeat economic data saw several indices trade to multi-month highs.

The best-performing of the bunch – the technology-laden NASDAQ – continued its stellar start to the year, and now has year-to-date gains of more than 25%.

In New Zealand, our local equity market has displayed more modest performance compared to its global peers, with the concern being that the recent Budget may stoke inflation pressures.

What’s happening in markets

The New Zealand Budget was the focal point, with Finance Minister Grant Robertson delivering a larger-than-expected headline spending figure highlighted by significant infrastructure spending and childcare support.

In its economic update, the Treasury forecasts that New Zealand will avoid a recession, while it expects unemployment will rise to 5.3% and inflation will fall back to its target range by the end of 2024.

Meanwhile, in the US, the ongoing debt ceiling saga continued to play out in Washington DC, with lawmakers on both sides of the aisle sounding somewhat optimistic they can get a deal done.

Although details of what a possible bipartisan deal may look like are unknown, it appears the focus will be on a percentage cap on discretionary government spending. The White House 2024 Budget is a ~9% increase from a year prior, while the Republicans are hoping to drop this number to below 5%.

After a rough patch of economic data earlier in the year, things have improved slightly in the US with employment data and some manufacturing reports both showing mild signs of improvement. The number of Americans filing new claims for unemployment benefits has decreased recently and the key survey of US manufacturers appears to have rebounded slightly from earlier in the year.

What’s important in the near term

The key issues for investment markets continue to be around central bank actions which are intended to suppress inflation. The next meeting for the Reserve Bank of New Zealand (RBNZ) is Wednesday 24th May and it is expected that the Official Cash Rate (OCR) will increase by another 25 basis points. However, after the larger-than-expected spending in the recent Budget, interest rate markets moved to price in a small chance of a 50-basis point rise in rates.

In the US, debt ceiling news will continue to dominate the headlines as 1 June comes closer, the day Treasury Secretary Janet Yellen said the US may run out of money to pay its bills.