Monthly Commentary | Jan 24

Markets performed strongly in December, continuing from where November left off to close out what has been another remarkable year.  Yields fell in most bond markets around the world on hopes major central banks would soon cut rates as inflation readings have continued to soften.  The Bloomberg Global Agg Index (NZD Hedged) returned 3.1% for December, and 5.7% for 4Q.  To put this quarterly return in context, the fourth quarter of 2008 – the midst of the GFC - was the only quarter in the last 20 years with a return over 5%!  Equity markets were also strong, with MSCI ACWI Index (NZD Hedged) up 4.0% for December and 8.9% for the quarter.  The Kiwi was up over 2.7% versus the USD so returns were not quite as impressive for unhedged investors - up 2.2% for the month and 5.4% for the quarter.  Closer to home NZ and Australian equities also rallied strongly, with the NZX50 up 4.0% and the ASX200 up 7.1% for December.

The sectors that performed best over the fourth quarter were the more cyclical ones such as Consumer Discretionary, Industrials, Financials and Materials.  Real Estate also did well after a tough couple of years in a rising rate environment.  Information Technology continued its leadership role and was comfortably the best performer over the year (+49.8%).  The US (+11.2%) and Europe (+8.3%) were the best regions in local currency terms for the quarter.  Japan delivered the strongest annual returns (+28.2%), ahead of even the tech-heavy US market (+24.2%).  The UK, Australia and NZ markets all posted positive returns for the year, but at 3.8%, 7.8% and 3.5% respectively, they lagged the broader global market.

Now inflation has moved lower, and with the majority of interest hiking cycles completed, the key challenge for central banks is balancing the possibility of inflation persisting slightly above target with the risk of weaker growth.  This is a dynamic not experienced in recent years, with the majority of the post-GFC / pre-Covid environment characterised by sluggish growth and very low levels of inflation, the combination of which resulted in the zero (or near zero) interest rate policies in many economies.