Investment Update

December Quarter 2023

Global markets 

Global financial markets had a strong finish to the year, with both international equity and bond markets finishing the fourth quarter higher. The main driver was lower government bond yields, due to signs of a continued easing in inflationary pressures, which suggests the world’s central banks are finished with interest rate hikes. In fact, the US Federal Reserve (the Fed) went one step further when it said it was discussing when it may be appropriate to reduce interest rates.

Against this backdrop, the MSCI All Country World Index rose 9.0% over the quarter (in local currency terms). It meant that over the year, this index was up 19.5%. Bond markets also saw strong gains. The yield on the US 10-year government bond fell 69 basis points over the quarter, following a historic two-month rally in November and December (its biggest since 2008). When bond yields fall, their prices rise.

The Fed leaves interest rates unchanged, but its ‘pivot’ sends markets higher

The Fed kept interest rates on hold throughout the quarter, maintaining its target range of 5.25% to 5.50%. However, following its December meeting, attention turned to Committee members’ updated expectations for the path of interest rates, as the Fed’s closely watched dot plot of interest rate expectations signalled that its inflation fight would no longer require another rate hike, and instead implied three quarter-point rate cuts in 2024.

Inflation weaker and labour market pressures easing

Markets also got a boost from easing US inflationary pressures. While November’s Consumer Price Index (CPI) data showed that the prices of goods and services edged higher, it was in line with expectations, and the annual rate continued to decline, falling to 3.1%

Falling gasoline prices have helped keep inflation in check, while shelter prices (rents) – which make up a third of the CPI weighting – continue to show a steady decline having peaked earlier in the year.

An easing labour market has also been good news for the Fed policymakers. Although payrolls grew faster than expected in November, the unemployment rate rose to 3.7%. And while wages are running higher than what would be consistent with the Fed’s 2% inflation target, they have gradually been cooling off too.

Oil prices fell sharply

Oil prices fell despite geopolitical unrest following the onset of the Israel-Hamas war. In fact, the price of a barrel of oil fell 21% over the quarter (in USD terms), as investors worried about sluggish demand for energy in China, and as oil output in the US remains close to record highs.

New Zealand market

The Reserve Bank of New Zealand (RBNZ) also left the Official Cash Rate (OCR) unchanged throughout the quarter, at 5.50%. However, in November, the RBNZ struck a rather hawkish tone, saying: “If inflationary pressures were to be stronger than anticipated, the OCR would likely need to increase further.”

It came amid mixed economic news. Gross Domestic Product (GBD) data showed that New Zealand’s economy shrank by 0.3% in the third quarter of 2023, with the decline being driven by goods-producing industries. On an annual basis however, the economy has grown 1.3% over 12 months. Meanwhile, inflation remained stubbornly high, at 5.6% – which the RBNZ said justified keeping rates higher to help bring this under control.

Markets at a glance

International equities

Global equities had a strong quarter, with markets buoyed by the prospect of rate cuts by the Fed in 2024. Falling bond yields were also supportive of equity market valuations.

In the US, the S&P 500 TR Index gained 11.7%, as it edged closer to an all-time high. Meanwhile, the tech-heavy Nasdaq 100 TR Index extended its gains by a further 13.8%, and the Dow Jones Industrial Average TR Index (a large-cap index representing 30 of America’s largest companies) returned 13.1%, with both hitting all-time highs. Most of the major sectors finished in the green, with technology services and information technology the standout performers, while energy fell given the decline in oil prices over the quarter.

Most other markets took their lead from the US. In Europe, the Euro Stoxx 50 Index was 8.6% higher. While Japan’s Nikkei 225 TR Index underperformed other major markets, it still gained 5.2%, as its market hit a new 33-year high in November.

A key laggard was the UK share market, which gained only 1.6% given its significant exposure to energy companies, which struggled as oil prices fell. The key underperformer, however, was China. The Shanghai Composite TR Index finished the quarter down 4.2%, as a lack of action from the central bank there to stimulate its sluggish economy weighed on sentiment.

Australasian equities

While the New Zealand equity market delivered gains, it underperformed many of its international counterparts. The NZX 50 Index returned 4.2% , but was held back by the prospect of the RBNZ keeping interest rates higher for longer given stubborn inflationary pressures. At a sector level, information technology was the standout performer, on the back of strength in this sector in overseas markets, while energy and the consumer discretionary sectors were two that struggled.

Of the 50 companies that make up the index, 32 delivered gains, with the other 18 finishing the quarter lower. The best performers were Fonterra Shareholders Fund (+15.6%), Stride Property Group (+15.3%) and Scales Corp (+14.6%). At the opposite end of the spectrum, Heartland Group, Air New Zealand and Kathmandu Holdings were the worst performers, falling 16.9%, 13.0% and 10.6% respectively.

Across the Tasman, the ASX 200 TR Index delivered a return of 8.4%. The real estate, materials and healthcare sectors were amongst the better performers, while the energy sector underperformed as the price of oil fell.

International fixed interest

Global bonds had one of their best quarters on record as the likelihood central banks were done with raising interest rates grew, with interest rate markets now suggesting many central banks could be cutting rates in 2024.

In the US, government bonds were strong performers after the Fed’s surprising pivot, with the Committee now focused on interest rate cuts in 2024. Against this backdrop, the yield on the US 10-year government bond fell to its lowest level in more than a year, closing at 3.88%.

European bonds were the best performers, helped by signs that inflation in Germany was trending back towards target levels, falling to 2.3% in the month of November, its lowest rate since June 2021. And in the UK, consumers and policymakers got some good news with a big drop in annual inflation to 3.9% in November, down from 4.6% the month prior.

New Zealand fixed interest

New Zealand bonds also delivered strong gains over the quarter, with yields dropping to multi-month lows. Despite this, the RBNZ remained one of the more hawkish central banks, where, at its November meeting it raised the neutral rate (the rate it expects the OCR to peak) to 5.69%.

However, these expectations were tempered a little with the news the domestic economy shrank in the third quarter, which was well below forecasts, including those of the RBNZ .

Over the quarter, the yield on the New Zealand 10-year government bond fell 98 basis points, closing at 4.32%.

Listed property and infrastructure

After a challenging start to the year, listed property had a good quarter, driven largely by the decline in yields, which makes cashflows offered by property assets more attractive.

In New Zealand, the listed property index rose 6.7% over the quarter, while in Australia the listed property sector was one of the best-performing globally, rising 16.6%.

Infrastructure stocks also had a good quarter, especially those with long-dated cashflow agreements. These became increasingly attractive with the significant decline in US long-dated bond yields.

Market outlook

The reversal in recent trends continued into December with bond yields falling to their lowest levels of 2023 as the prospect of interest rate cuts in 2024 grew.

Our base case is that growth continues to slow but remains positive over the short term in the US, with weaker growth in Europe and New Zealand. We expect labour market demand to continue to soften, partly due to an easing in consumption in the face of new headwinds. Meanwhile, core inflation should make slow progress towards target levels. We believe an extended period of tight monetary policy will eventually weigh on growth enough to tip it into negative territory, consistent with a mild recession.

At a global level, the key pillars we’re closely monitoring include:


Investors seem comfortable that inflation will track back down to target levels over the medium term, citing the long and variable lag in monetary policy. However, there remain upside risks to inflation in the short term; oil price volatility given ongoing geopolitical risks, wage pressures from tight labour markets, and elevated rents.

Soft landing or hard landing

Overall, we still view a hard landing as the more likely outcome given the amount of monetary policy tightening that has occurred and is still working its way through the global economy. With growth likely to slow in the US from a number of headwinds to the consumer, and central bankers willing to hold rates in restrictive territory for an extended period, it is more likely that the US recession has been delayed rather than avoided.


The trends present in the first half of the US earnings season have continued, with better than expected earnings reports and resilient sales offset by less optimistic forward guidance. The market reacted more strongly to both upside and downside surprises this reporting season, creating price volatility in individual names. Retailers have highlighted increased price sensitivity and weaker sentiment from consumers, which aligned with commentary from payment solutions providers earlier in the reporting season. Any evidence of softness over the holiday spending period will point to a deterioration in the strength of households and the broader economy.

Other articles in this edition

Important information

This material is prepared based on information and sources ANZ Bank New Zealand Limited (‘the Bank’) believes to be reliable. Its content is subject to change and is not a substitute for commercial judgement or professional advice. To the extent permitted by law the Bank disclaims liability or responsibility to any person for any direct or indirect loss or damage that may result from any act or omission by any person in relation to this material. Past performance does not indicate future performance. The actual performance any given investor realises will depend on many things, is not guaranteed and may be negative as well as positive.