Market Update: Divergence

Tidal – that’s one way to describe financial markets over the past three months. In March, performance was strong, April saw a dip, and then in May, things picked up again.

It’s rather like waves at the beach: one wave crashes in, recedes, and another follows. Similarly, markets generally tend to surge with good news and retreat with bad news, influenced by macroeconomic factors like inflation and interest rates, and more recently, divergent economic recoveries.

‍

A look at divergent economic recoveries

Six months ago, the primary focus of Central Banks around the world was on controlling inflation, with countries hiking and holding interest rates to cool down their economies. Today, the economic outlook is far more mixed, with each economy addressing specific issues.

The US economy has been strong overall – prompting the Federal Reserve to delay cuts to interest rates – but performance continues to fluctuate. Take, for example, employment data: the net increase in workers added to payrolls continues to fluctuate each month, with the number added in May 2024 below forecast.

While these fluctuations continue to drive market volatility, the general consensus is that the US has successfully engineered a soft landing, and the Federal Reserve is anticipated to start cutting interest rates in the second half of the year. Although as seasoned investors will know, the outlook may change with new economic data.

In other parts of the world, Europe, under the European Central Bank (ECB), has started cutting interest rates as inflation appears to be under control. Japan, facing currency issues, might increase interest rates to stabilise its currency, contrary to global trends. Meanwhile, China reports strong economic numbers but struggles with underlying housing and consumer spending issues, casting doubt on its future growth.

And as for New Zealand, we are grappling with what is widely regarded as a weak economy. The recent budget, which introduced an expansive fiscal policy injecting an additional $12billion, aims to support growth. However, this move is also expected to maintain inflation, and the RBNZ has indicated that interest rate relief might not come until 2025.

‍

Time to look further than the Magnificent Seven?

Another hot topic in equity markets is the performance of the "Magnificent Seven."

Lately, there's been a lot of growth among big companies, especially in the tech sector. Companies like Nvidia and Microsoft have been doing exceptionally well, earning them the nickname "Magnificent Seven."

However, the concentrated strength in a few companies poses a challenge: the market must decide whether these companies have further growth potential or if their future gains are already fully priced in. 

While it's uncertain whether these Tech giants will continue to be massive growth engines, relying on their dominance might be increasingly challenging. Consequently, many investors are seeking growth opportunities in other areas, particularly outside the US. Diversification becomes essential, especially since perfect market timing is unattainable. After all, there is no crystal ball.

‍

A closer look at New Zealand

As mentioned earlier, the recent budget outlined an additional $12 billion in government spending over the next four years, reflecting a significant investment in the domestic economy. Despite some announced cuts, the government's spending remains on par with, or even slightly higher than, the previous year under Labour. This boost in expenditure is expected to strengthen the domestic economy and positively impact GDP.

However, the implications of the upcoming tax cuts in July remain uncertain. The question is whether these cuts will stoke inflationary pressures or provide necessary relief without significantly affecting inflation.

One point analysts do agree on is the uncertainty regarding the pace at which the New Zealand economy might stall. While there is consensus that economic pain is inevitable in the near future, the timing and speed of this downturn are unclear. This uncertainty affects decisions about interest rate cuts, which are unlikely to occur until the economic slowdown is more evident.

All in all, the New Zealand economy is poised to bear the brunt of past economic decisions later this year, assuming no other major global disruptions occur. As we navigate these economic uncertainties, strategic asset allocation and diversification will be essential for investors looking to mitigate risks and capitalise on opportunities in a volatile market.

‍

Key considerations for investors

• ‍Asset Allocation and Risk Management: Investors should take a good look at their asset allocation and understand the risk levels they're dealing with. Here, risk means how much their portfolio's value might swing up and down. Since market fluctuations are expected, it's important for investors to know their comfort zone for both gains and losses. If someone has a smaller stake inequities, they might miss out if the market soars, but they also need to be okay with potential declines if the market crashes. Being ready to handle market volatility is crucial. 
• ‍Diversification: Diversification is key too. With different economies recovering at different paces, having a mixed portfolio is essential. Diversification lets investors benefit from recoveries in various markets, spreading out risk and boosting the chances of gaining from economic upturns, no matter where they happen. Staying diversified will likely be important in navigating the uncertain economic landscape ahead.

‍

In summary…

The past few months in the financial markets have been a rollercoaster, reflecting broader economic uncertainties. While the tech heavy "Magnificent Seven" have shown impressive growth, their future remains uncertain, prompting investors to look for opportunities beyond these giants. As global economies diverge in their recovery paths, strategic asset allocation and diversification become critical. In New Zealand, economic policies aim to boost growth, but the timing of a potential downturn and its impact on inflation remain concerns. Navigating this volatile landscape will require investors to balance risk and diversify their portfolios to potentially capitalise on emerging opportunities.

‍

Get in touch

Do you have any questions for us? Please don’t hesitate to contact us. We’re in your corner.

The information contained in this publication is intended for general guidance and information only. It has not been personally prepared for you. Therefore, you should not act on this information if you have not considered the appropriateness of this information to your personal objectives, financial situation and needs. You should consult with us before making any investment decision. Historical market performance may not be indicative of future market performance.

‍