Resilience has consequences
September saw divergent fortunes for various asset classes. Bonds were markedly weaker, broad share markets also struggled but large technology stocks saw strong gains. Funds with greater exposure to global technology shares benefited, while funds with bonds and Australasian equities did not.
With the global economy proving resilient to shocks, focus has turned to how much central banks need to raise interest rates to restrain elevated inflation. A range of central banks are now hiking, joined in September by the US Federal Reserve. Expectations of further rate hikes increased across developed economies, sending bond prices lower and yields higher.
Our fixed income exposure has been concentrated in shorter dated NZ bonds and whilst these have outperformed other parts of the bond market, NZ bond prices were also weaker on the month, weighing on our low-risk funds. We continue to add to this position as the risk/return looks increasingly attractive.
Broad share markets fell modestly in September. However, that masked a wide range of outcomes, with large technology company shares significantly outperforming the rest. Investor enthusiasm for tech was reignited by Meta’s announcement of its new AI agent, Muse. This benefited Meta shares (+26.8%), while also benefiting semiconductors with Nvidia (+3.6%) and Taiwan Semiconductor (+10.1%) – all key performers for us. Outside of tech, the prospect of more meaningful periods of interest rate increases weighed on interest rate sensitive stocks, with financials, real estate and utilities most affected. Australia and New Zealand shares were lower, falling 2.4% and 0.4% respectively given their limited technology exposure.
Looking forward, strong global growth alongside elevated inflation is a reasonable backdrop for shares. Against that, central banks are newly emboldened to fight inflation by raising interest rates, increasing the risk of slower economic growth ahead. This is the consequence of resilience: a stronger central bank focus on fighting inflation and the potential volatility that comes with it. Bonds have borne the brunt of this in recent months, but if growth weakens, they would likely rally, meaning these assets remain useful in diversified portfolios. In shares, we remain constructive on technology while having reduced exposure to non-tech parts of the market, most notably Australian and New Zealand shares.
