After an exceptional run in November and December, the markets finally took a breath in January rising only 2% for the month. Global markets shot up 13% over November and December after confirmation from the US Federal Reserve that interest rates would go no higher and would start to come down in 2024. It appeared that the markets had pulled off the impossible, a soft landing.
Against this back drop, it was unlikely that January 2024 was going to continue in this vane so therefore a 2% increase should definitely be seen as a positive outcome. Outside of the interest rate discussion there was big news in the crypto world and over in Asia we saw some big moves in both China and Japan.
Source: Factset: kōura returns are pre tax and post fees. Returns over 12 months are annualised. Past performance is not necessarily an indicator of future performance and return periods may differ. Local market returns use the relevant markets indices; NZ Equities uses NZX50 index; US Equities uses S&P500 index; Rest of World uses MSCI EAFE Index; Emerging Markets uses MSCI Emerging Markets Index, Fixed Interest uses Bloomberg Aggregate NZ Composite Bond Index. Bitcoin return is the USD change in price of Bitcoin.
1. Investors are becoming increasingly nervous on the timing and extent of interest rate cuts
Economic data has remained extremely strong with the global economy continuing to grow, confidence continues to improve, and unemployment remains low. In some regards, this is great as it potentially means that the “roaring 20’s” are continuing and this could look similar to the 1920’s. On the other hand, this also means that inflation has the potential to quickly reignite as the economy is still running hot.
On 31 January, Jerome Powell (US Reserve Bank Governor) all but effectively confirmed that interest rates will not be reviewed until May and the market needs to forget about a March interest rate cut. Whilst confirming that the next move on interest rates will be lower, he has pushed the timing out.
Surprisingly, despite the change in conversation on interest rate cuts, interest rates ended the month at the same place that they started 2024, though materially lower than where they peaked in October.
2. China continues to worry global investors
The Chinese market is confounding investors, it is either completely uninvestable or alternatively it is the buy of the century. The Chinese market now trades at an almost 40% discount to the US market reflecting the fear surrounding that market. The Chinese market fell 13% in the month
The economy remains weak, and it does not appear that the Government is prepared to step in and provide the necessary stimulus to get the economy back on track.
China has been a very difficult trade for investors over the past 12 months. 2023 was meant to be a great year for China coming out of Covid lockdowns, though unfortunately the growth never materialised, and the Government has refused to provide stimulus for fear of restimulating the economy. The current political priorities appear to be more focused on rooting out excess and corruption rather than softening the blow of weaker trade and a soft property market.
3. Interest rates are falling in New Zealand – now time for the banks to step up
Here in New Zealand, interest rates have largely followed global trends and over the past 3 months wholesale interest rates have fallen c.1% as economists and investors are now starting to expect interest rates to fall. While the RBNZ is trying to slow the markets down and is talking tough (saying that the inflation battle is still ongoing and interest rates will stay high) markets do not believe it.
The NZX 50 is up 11% over the past three months reflecting this move in interest rates. Hopefully banks now do their part and follow through with lower mortgage rates. Interest margins are likely to be at record highs at the moment, so hopefully some of that will be given back to New Zealand mortgage holders shortly.
4. January was the month that Bitcoin went mainstream
On 10 January, the Securities and Exchange Commission in the US reluctantly approved a number of Spot Bitcoin ETF’s. In simple terms, this means funds will be listed on the Stock Exchanges in the USA that will invest exclusively in Bitcoin and should replicate the price of Bitcoin. This makes investing in cryptocurrencies much easier; you no longer need to get a wallet and you can now purchase an exposure to Bitcoin in the same way that you can any other share.
The SEC has been reluctant to approve these products for the past 5 years siting fears of market manipulation and the ability to securely hold Bitcoin. However, a December court ruling effectively required the SEC to seriously look at the products and ignore their concerns.
Investors were initially excited by the move, pushing the Bitcoin price as high as $49,000 on the day the ETF’s launched. Though the price quickly fell back to a low of $38,000 as the hype died down. It showed that that the old adage of buy the rumour and sell the fact is more often true than not.
Interestingly, the funds have had net inflows of $857m over the period, for some this is a big win for others it is a disappointing result. I suspect that large investors are waiting to see how things play out and where things settle down before they start buying. If that happens, we might finally get a wave of net buyers coming into the asset class.