Market Update: Lessons and insights from 2023

With the end of the year upon us, it’s time to take stock of 2023, in particular what happened in the past few months, and what will likely remain the headline story for 2024 – inflation.

For more on this, check out our latest Quarterly Market Update.

Focus steady on inflation and interest rates

Despite strong signs that inflation may finally be loosening its grip, it’s not yet clear if central banks have done enough to rein it in or whether further interest rate increases are needed to stamp it out.

According to the latest Consumer Price Index (year to September 2023), New Zealand’s annual inflation rate sits at 5.6%, compared to 6.0% in the previous quarter. Some economists – including Kiwibank chief economist Jarrod Kerr – say this is a sign that we’re “winning the war” on inflation. But the reality is that the last battle may be the trickiest as the Reserve Bank tries to get inflation into its target band of 1% to 3%. The bank made it clear in November that it is not time to be complacent and it was not ruling out another official cash rate increase.

Meanwhile, across the Tasman, the Reserve Bank of Australia recently increased its cash rate by 25 basis points to 4.35% (a 12-year high, and the 13^th consecutive increase). With the annual inflation rate hitting 7% in November, the RBA knows it has some work to do to reduce inflation to within its target range of 2-3%.

The impact of Middle East tensions

Recent geopolitical developments in the Middle East have shifted the focus away from the ongoing conflict in Ukraine, while also spotlighting the vulnerability of global energy supplies. While initially oil and commodity prices saw a spike, they have since come backdown – but it’s a fragile scenario, to say the least.

Once again, just as it happened with the Russian attack on Ukraine, we’re reminded that energy markets are closely intertwined with political stability. Any sustained disruption can have significant ripple effects across economies and sectors, we just don’t know to what extent.

While we wait for diplomatic progress, the importance of having a diversified portfolio, designed to weather these uncertainties, cannot be overstated. 

NZ sharemarket in ‘bear market’ territory

For the third year in a row, the NZX has had a tough 12 months. In the year to December 15, the market was down 3.6%. Interestingly, this lacklustre performance bucks the global trend, with most international sharemarkets recording gains to date this year, and some by double-digit percentages.

Our view is that this trend may comedown to changing global demand patterns and the fluctuations in dairy prices, which are significant export commodities for our country. We’re possibly experiencing a necessary market adjustment to a new economic reality. New Zealand’s market is also dominated by dividend stocks that are potentially more exposed to higher interest rates.

From an investment strategy perspective, it’s another reminder of the importance of being invested internationally. Remember: spreading investments across different markets can offer a buffer against local volatility and give you access to a broader range of growth opportunities.

The aftermath of the general election

New Zealand is now starting to seethe work programme of the new, three-party coalition government.

While the initial market reaction to the change of government was muted, likely due to the advanced pricing of the possible election outcome, the new coalition is perceived as more business-friendly than its counterparts.

The turning tide on fixed interest and bonds

Investors with exposure to fixed interest and bonds may find a silver lining in the current economic climate, with bond yields surging to levels that we haven’t seen since 2008 and 2009.Investors holding diversified portfolios with exposure to bonds are likely to start seeing the benefits.

In the meantime, more and more people are turning to term deposits, due to their enticing rates. However, it’s important to point out that, once taxes and inflation have been factored in, the real return on term deposits can often be negligible or even negative. Simply put, if the interest rate on your term deposit doesn’t keep pace with the cost of living, your money is actually losing purchasing power.

That’s why, in the long run, you are still likely to need a diversified portfolio with equity investments (e.g., shares) providing the growth potential necessary to outpace inflation.

The bottom line: Time for a reality check on retirement planning

In October, Massey University’s NZ Fin-Ed Centre published the latest Retirement Expenditure Guidelines. Once again, the research highlighted a widening gap between the living expenses that retirees face and the income provided by NZ Superannuation.

The survey indicates that for a couple (living in Metropolitan NZ) to have a retirement with choice, they may require up to $1,665 per week on average. Of this, only $763 comes from Government paid NZ Super. This means $902 needs to be sourced elsewhere, be that your KiwiSaver plan, the sale of your home, or other investments.

Unfortunately, many people are just banking on the sale of their property, without additional savings strategies. Others believe that a 3% contribution alone to their KiwiSaver plan will set them up for a comfortable retirement – but that’s rarely the case. Depending on your situation, and how long you have until retirement, you may find that you need to contribute significantly more, to your KiwiSaver or other investment plan to achieve your desired retirement lifestyle. Can’t increase your contribution rate to the required amount immediately? Depending on your situation, you might consider gradually increasing it (e.g., by 1% each year)to ease into building your retirement nest egg.

So, here’s the bottom line: it’s generally not a good idea to rely on any single income stream for retirement, without a plan. To avoid potential financial shortfalls, make sure you accurately calculate how much you may need to save and, if possible and needed, adjust and diversify your retirement income sources.

If you’d like to talk about your saving needs and explore the potential income from various assets – get in touch. As financial advisers, we can be your sounding board. And if a matter is outside our direct expertise, we can guide you to professionals who can help.  

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.