Quarterly market update

Overview of investment markets for the quarter ended 31 December 2023 from our investment manager, Mercer.

Market summary

The final chapter of 2023 started as the previous one finished, but soon recovered to see equity markets rallying back towards their 2023 highs. Both equites and bonds saw strong returns after a poor start in October, with November providing the strongest set of monthly returns in over three years.

US markets received a leg-up as investors reacted with fervor at the prospect of rate cuts in 2024. With market commentators pronouncing the rate hiking cycle to be at its end and rhetoric from the US Federal Reserve (Fed) striking a dovish tone, markets jumped at the first sign of a let-up in rates. Of note were the S&P 500 and NASDAQ, which were up 11.7% and 13.8%, respectively. As we have seen more than once in this cycle, Wall Street has been much more eager in its expectation for rate cuts, pricing in sharper and more prompt rate cuts than communicated by Fed officials.

This expectation of imminent rate cuts also fed through into global bond markets, with yields falling across the curve in response. The Bloomberg Global Aggregate Bond Index (100% hedged to NZD) returned 5.7% over the quarter.

US economic data softened through the quarter, with annual CPI slowing from 3.7% to 3.2% in October and to 3.1% in November. Economic growth for Q3 was revised down to an annualised 4.9% from 5.2%. Job growth also slowed in the US as unemployment hit 3.7%, while non-farm payrolls were up approximately 180k in November and 150k in October, both short of the 2023 average.

The same story played out in other territories, with weakening economic data and strong investment returns coming amidst a dovish monetary policy backdrop. The Eurozone and the UK largely followed the US, as the expectation that there would be no further rate hikes spurred equity returns. Eurozone CPI fell through the quarter, with November’s data coming in at 2.4% year-on-year (y/y). In the UK, CPI dropped to 3.9% y/y, much lower than the previously predicted 4.4%. Moderating economic data gave credence to the argument for rate cuts to begin in 2024, though both central banks remained coy.

Sector commentaries

This chart shows the returns of various market indices1 for periods ending 31 December 2023. Key: NZE New Zealand equities; AE Australian equities; GE Global equities (local currency); GENZD Global equities (hedged); EME Emerging market equities; GP Global property; GLI Global listed infrastructure; NZB New Zealand bonds; GB Global bonds; C Cash; FC Foreign currency effect. The ‘foreign currency effect’ is the difference between the unhedged and hedged2 overseas share returns.

Trans-Tasman equities

Trans-Tasman equities were up in Q4, with the S&P/NZX 50 and S&P/ASX 200 returning 4.3% and 8.4% (local currency), respectively. The interest rate situation remained the same on both sides of the Tasman, with both countries seemingly further along the road than global counterparts after opting to begin hiking earlier than peers. At home, business confidence had reached a two-year high, indicating a positive outlook in the market. This shift in sentiment may have been influenced by expectations of interest rates reaching their peak and the outcome of the NZ election, which resulted in the formation of a National-led Government which is perceived to be economically and business friendly.

Global equities

Equities were again the star for the quarter, as the continued strength in US tech mega-caps was this time supported by positive returns across the board. The S&P 500 finished up 11.7%, despite falling -2.1% in October. Growth stocks (7.6%) outperformed value (3.7%), as the prospect of 2024 rate cuts was too much for the market to resist. Emerging market equities were up 5.6% but fell short of developed markets. China continues to be a drag on performance, as the much talked about post-COVID recovery continues to stutter.


The real estate sector proved to be a strong performer in the final quarter of the year, as global real estate investment trusts outperformed traditional equities and bonds. A future easing of interest rates has opened the door to a more positive lending environment, in turn making the property sector more appealing. Much has been said about the impact of workers not returning to the office in recent times. This has provided a cloudy sentiment over the sector, however, given the limited exposure within the FTSE EPRA NAREIT Developed Index, we consider the impact to have been somewhat overstated. The FTSE EPRA NAREIT Developed Index returned 12.9% (100% hedged to NZD) over the quarter and 9.4% over the 2023 calendar year.

Listed infrastructure

Listed infrastructure assets were up for the quarter, as they benefitted from the potential end of the hiking cycle. Toll roads were a strength of portfolios as the trend to cars from public transport in the wake of COVID continues to boost the user base and frequency of use of toll roads despite the associated cost increases due to inflation. Airports have performed well, up 9%, as the post-COVID travel boom continues to gather momentum. Mexican airport stocks were a particular highlight as a result of regulatory changes which saw increasing tariffs chargeable to airlines.

NZ bonds and cash

With the Reserve Bank of New Zealand (RBNZ) leaving interest rates untouched throughout the quarter, yields on NZ Bonds fell. The yield on the NZ 10-year Government Bond, which had reached a peak of 5.6%, ended the year at 4.4%. Before the RBNZ’s November meeting, the general feeling was that the official cash rate would be cut in the second half of 2024, however, the accompanying announcement put the kibosh on that, with forecasts indicating cuts to begin in mid-2025 and potential for another hike before then.

Global bonds

Government bonds benefitted from expectations of dovish monetary policy as yields fell in the face of tight market conditions. The Fed opted to hold rates twice more, while the European Central Bank (ECB) and Bank of England (BoE) also kept rates flat. After the Fed’s December meeting, the market began to price in three cuts in 2024 instead of two. The US 10-year Treasury yield was down 46bps to 3.89%, while the UK 10-year gilt was down 90bps to 3.54%. Corporate bonds also fared well in November’s mini-boom, as soft-landing scenarios look more and more likely.

1An index is a ‘basket’ of securities, the changes in value of which are designed to represent the movements of a particular market or market sector. An example is the Morgan Stanley Capital International World Index (MSCI World) for international equities.

2Currency hedging is a tool used to remove the potential loss arising from movements in foreign exchange rates. When overseas investments are hedged, returns are broadly in line with the underlying market or local currency return.

This information has been prepared by Mercer (N.Z.) Limited (Mercer) for general information only. The information does not take into account your personal objectives, financial situation or needs. Before making any investment decision, you should take financial advice as to whether your intended action is appropriate in light of your particular investment needs, objectives and financial circumstances. Neither Mercer nor any related party accepts any responsibility for any inaccuracy. Past performance is no guarantee or indicator of future performance.