Market update - quarter ending 30 September 2024

During the September quarter, interest rate cuts were a hot topic as many global economies like the US, key countries in the Eurozone and New Zealand started to lower their rates.

July saw the start of what was dubbed the “great rotation” within the international shares sector, and this trend continued throughout the quarter. Markets began moving money out of mega-caps to focus instead on small-cap stocks and investments in the value sector, which are more responsive to interest rate movements. This change was driven by increasing optimism for a smooth economic transition and underwhelming earnings reports from the "Magnificent 7" tech giants for the quarter ended 30 June.

Japanese stocks fell by 4.9% in July, after the Bank of Japan raised rates and hinted at more increases. This coincided with a weak US job market report. As the interest rate gap between the US and Japan narrowed, the yen strengthened, prompting investors to quickly unwind trades that depended on low borrowing costs in Japan. Although a more positive tone from Bank of Japan officials helped reduce some losses, the market still finished the third quarter down.

In contrast, European stocks saw modest gains, with the MSCI UK and MSCI Europe indices gaining 3.4% and 2.1% respectively in local currency terms. Economic data reinforced the sluggish nature of the Eurozone recovery. In the US however, the S&P 500 index continued its march higher, returning 5.9% over the quarter (with US value stocks outperforming their growthier counterparts and a rally in small-cap stocks). This suggested that the rally in international share investments was broadening away from mega-caps and beyond technology stocks.

In fixed income markets, expectations of lower interest rates led to strong performance, with the Bloomberg Global Aggregate Index (NZD hedged) returning 7.0% in the third quarter. Both government bonds and credit instruments generated strong returns, and emerging market debt returned 6.1% during the quarter, making it one of the top performers in the fixed income sector.

Glossary of terms

Great rotation: This refers to a big change in how investors choose where to put their money. It usually involves moving money from one type of investment (like bonds) to another (like shares), based on market conditions and the economy.  In the quarter ended 30 September, it meant investors moving their share investments from mega-caps into small-cap stocks and the value sector.

Mega-caps: These are very large companies with high market capitalisation and influence.

Small-cap stocks: This refers to shares in smaller companies with lower market value.

Value sector: This refers to specific industries or companies whose shares are considered undervalued compared to their earnings.

Magnificent 7: Seven major tech companies which have led the market's recent growth (2023 and 2024) – Apple, Microsoft, Amazon, Alphabet (Google), Meta (formerly Facebook), NVIDIA and Tesla.

Stocks: These are also known as equities or shares, and are ownership interests in companies. If a company does well, you can earn profits from it, known as dividends, and benefit from growth in the value of its shares (though shares can also decline in value).

Bonds: Bonds (also known as fixed interest investments) are loans, usually made to a corporate entity or government. In return, the borrower pays a set amount of money over a certain period.

 

This information has been prepared by Mercer (N.Z.) Limited for general information only. The information does not take into account your personal objectives, financial situation or needs.

19 November 2024