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.
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 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.
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.