The US economy also proved very resilient in 2023, but the jury is out as to whether it’ll fall into recession this year.
Financial markets have become increasingly confident the Federal Reserve might’ve done the impossible and pulled off a soft landing.
With the annual US inflation rate having fallen from 9 per cent to 3 and the economy still looking healthy, there’s every chance they have.
However, some economists still see a slowdown on the horizon, so a dose of caution is required.
The good news is that if the US does fall into recession it’s likely to be a mild one, rather than something that evokes memories of the GFC.
Will mortgage and term deposit rates fall this year?
Yes, which means this is probably as good as it gets for savers, and life should become easier for borrowers from here on in.
At 5.50 per cent, the Official Cash Rate (OCR) is the highest since 2008, and the latest Reserve Bank of New Zealand (RBNZ) forecasts suggest it won’t fall below these levels until the middle of 2025.
However, inflation has been falling faster than expected and financial markets are calling the RBNZ’s bluff.
They see four rate cuts in 2024, which means the OCR could end this year as low as 4.50 per cent.
If that occurs, the one-year mortgage rate might be closer to 6 per cent (compared with above 7 per cent today), and six-month deposit rates could’ve fallen to about 5, from 6 per cent today.
Even if these OCR cut hopes prove optimistic, interest rates still look to be headed lower by some degree this year.
Will the housing market rebound continue?
After surging to artificially high levels during the Covid-19 period, national house prices fell almost 20 per cent between November 2021 and May 2023.
Since then, they’ve stabilised and rebounded about 5 per cent.
House prices are likely to keep pushing higher in 2024, on the back of improving sentiment, a friendlier policy backdrop, strong migration and the prospect of lower interest rates.
Having said that, I wouldn’t get my hopes up for another major boom. There are still headwinds on the horizon, such as rising unemployment, mortgage rates that will settle well above their 2021 trough, and low affordability.
Can international sharemarkets keep performing well?
Yes, but we should expect some bumps along the way.
Lower inflation and easing monetary policy will be a tailwind, with financial markets expecting the first Federal Reserve rate cut in March, and no less than six during 2024.
However, if the Fed ends up moving a little slower than hoped, some of the recent gains could reverse.
The same goes for productivity developments in the AI space. We know these will come in time, but markets might start getting impatient with the high-flying tech sector if they don’t arrive soon enough.
Finally, it’s also a presidential election year in the US, which could add to the volatility.
In the 15 election years since 1960, US shares have only fallen on two occasions (2000 and 2008).
However, that doesn’t mean we won’t see some uncertainty in the lead-up to early November. It’s not uncommon for markets to be volatile in the first half of an election year.
Are New Zealand shares likely to drag the chain again?
The New Zealand market has lagged its global counterparts since 2020, after outpacing them for seven out of the 10 years prior to that.
Last year was subdued for the NZX 50 index, with its 2.6 per cent gain well behind the 22.8 per cent return from global shares, as well as our own 25-year average of 8.9 per cent.
While other markets flirt with record highs, the NZX 50 finished last year 13.2 per cent below its January 2021 peak.
One reason is that our market is more sensitive to interest rates than most.
We have a lot of utilities, infrastructure and real estate stocks, which perform well when interest rates are stable or falling, rather than rising sharply as has been the case these last two years.
To shake off the apathy, we need a shift in the interest rate outlook and for declines to be on the horizon. This could well be a story for 2024, and it might see the underperforming local sharemarket come back into its own.
Have investors who’ve been on the sidelines missed the boat?
Not at all, but they will if they stay there for too long.
Despite negative rhetoric, 2023 was a very lucrative year for well-diversified investors.
New Zealand fixed income had its strongest year since 2014 with a gain of 7.5 per cent, and while local shares went sideways, international shares posted stellar gains.
A middle-of-the road investor probably enjoyed a portfolio return of about 9 per cent in 2023, after fees.
In contrast, cash in the bank would’ve delivered a gain of just above 5 per cent during 2023 (with the entirety of that being taxable).
While respectable, term deposit returns haven’t kept pace with inflation. As a result, investors who sat comfortably on the sidelines throughout 2023 are slightly less wealthy than they were a year ago.
Today, the NZX 50 is offering a gross dividend yield of 4.3 per cent, which isn’t too shabby.
This income stream is likely to grow in the coming years (as dividends increase in line with corporate earnings), rather than shrink as term deposit rates will (as the OCR declines and deposit rates follow it lower).
Combine this with some modest capital appreciation as sentiment improves and funds move from the sidelines into more productive assets, and it’s probably a good time to be reevaluating one’s investment strategy.
Mark Lister is Investment Director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision Craigs Investment Partners recommends you contact an investment adviser.
