Santa takes a breath
December saw a pullback in global share and bond markets with Milford’s funds also modestly lower. After such a stunning rally in shares over the past couple of years it is perhaps unsurprising that markets paused for breath.
The global economic outlook continues to look rosy with a strong US economy and resilience elsewhere, bolstered by an interest rate cutting cycle. But inflation is not dead, and the last couple of months have seen a sharp recalibration of market interest rate expectations with investors now expecting interest rates in the US to be higher over coming years. This recalibration is reflected in the bond market with long-term bond prices moving sharply lower in recent months. Milford’s bond investments are shorter term in nature, and typically in corporate bonds that offer higher yields. This has allowed us to avoid much of the losses in the bond markets for our lower risk funds.
Share investors don’t tend to like higher interest rates, and perhaps this was the proximate cause of the weakness last month. In fact, weakness in global share markets would have been much more pronounced were it not for strength in the large technology companies. Our holdings in Amazon (+5.5%) helped cushion some of this global weakness last month but otherwise the losses in shares were broad based across sectors and geographies. Australian shares fell 3.4%, dragged down by the heavyweight banks. Our largest Australian holding Telstra outperformed, rallying 1.3% last month.
New Zealand shares bucked the global trend last month, closing the month up 0.3%. Encouragingly, it was our core NZ holdings that led the charge with Contact Energy up 5.6%, recent add Spark up 0.7% and Auckland Airport up 12.1%. These companies are benefiting from lower domestic interest rates, making their dividend yields increasingly attractive.
The turn of the year heralds an optimistic outlook for the global economy and company profits. The risks lie in the current valuations of shares, with US shares looking particularly pricey. We are managing this by looking for cheaper global alternatives, whilst continuing to pursue our nimble, active approach to investing.
