Ceasefire in the Middle East and renewed excitement about AI was enough to see a dramatic turnaround in share markets this month. In contrast, bond markets remain under pressure as energy-driven inflation has investors wary about central banks hiking interest rates. Milford funds fared well, with high-growth funds in particular seeing high monthly returns.
The strength in shares last month appears at odds with ongoing uncertainty around the Middle East. Although most shares bounced, much of the performance was driven by the large technology companies, as AI advancements reignited investor enthusiasm for these companies. Top holdings Amazon (up 27%) and Microsoft (up 10%) were the key drivers of performance last month, alongside semiconductor companies Nvidia (up 14%) and Taiwan Semiconductor (up 17%).
Outside of technology stocks, share market performance was more lacklustre. Australian stocks only managed a 2.2% rally, but within that there were winners for us with Goodman Group up 16%. NZ shares were also poor relative performers, unchanged on the month, but stocks such as Infratil (up 7%) bucked the trend. Notably, both Goodman and Infratil are AI winners through their data centre businesses.
Bond markets continue to struggle this month as investors, fearing another energy driven inflation shock, continue to price a new global central bank hiking cycle. So, whilst bond returns were modestly positive last month, they still represent better value than cash going forward. In NZ for example, investors are pricing the RBNZ to hike rates to 3% by the end of the year. We think this is unlikely to happen and have been adding to NZ bond exposure accordingly.
Looking ahead, the outlook hinges on two forces. Firstly, the oil price is drifting higher and the geopolitical situation appears hard to resolve. will continue to lift inflation and weigh on global economic growth in the short -term. Secondly, the AI theme continues to build momentum and AI related stocks, which dominate major indices, could continue their strong recent trend. How these forces interact will determine the path of asset prices ahead. Either way, US shares (being technology heavy and less exposed to the oil shock) look more attractive than those elsewhere in the world, whilst shorter term bonds in NZ continue to offer a solid base for returns.
