A Fast Finish

Funds delivered strong performances in December, building on the positive November to finish the year with solid gains. This performance was driven by broad rallies across shares and bonds as investors fully embrace the soft-landing outcome of falling inflation and positive economic growth.

The last two months of the year were characterised by a rally in all assets. That is illustrated by the fact that in December, both global shares and global bonds* rallied by 4.2%. Milford funds have tended to be more cautious on shares over the past year, with a preference for bonds, and particularly corporate bonds. This has rewarded us with strong performance, coupled with lower volatility than seen in the share markets.

The rally in shares has been broad based with strong performance from regions, sectors and styles. For highlights of stock performance see individual fund reports. Regionally, we have recently increased exposure to Australia. In December, the Australian market was an outperformer, with the larger cap ASX 200 index up 7.3% in the month. NZ shares rallied 4.0% in December, lagging other shares. We continue to have reduced exposure to the local market.

The strong performance of the bond market has been underpinned by an expectation that the inflation battle has been won and central banks will move to unwind the interest rate hikes of the past two years. On top of the move in interest rate expectations, corporate bonds continue to rally even more, delivering strong price performance from these assets. Whilst we still favour corporate bonds, the strong rally has facilitated a reduction in exposure recently.

After such a strong run in asset prices over a short period, it is natural to expect some consolidation (some of which has already been seen early in 2024). Market pricing across bonds and shares reflects a high degree of optimism around the path of inflation (stable at lower levels) and growth (modestly positive), enabling rate cuts from central banks (sooner rather than later). The path of inflation is key, and we would be wary of any signs of acceleration.

*MSCI world share index in local currency and Barclays Global Aggregate Bond index