Market update – Quarter ending 30 September 2024

During the September quarter, interest rate cuts were a hot topic as many global economies like the US, key countries in the Eurozone and New Zealand started to lower their rates.

July was dubbed “the great rotation” for stocks, starting a trend that continued throughout the quarter. Markets began to focus on small-cap stocks and value sectors, with money moving out of mega-caps and into assets that are more sensitive to interest rates. This change was driven by increasing optimism for a smooth economic transition and underwhelming quarterly earnings reports from the "Magnificent 7" tech giants in July.

Japanese stocks fell by 4.9% after the Bank of Japan raised rates in July and hinted at more increases. This coincided with a weak US job market report. As the interest rate gap between the US and Japan narrowed, the yen strengthened, prompting investors to quickly unwind trades that depended on low borrowing costs in Japan. Although a more positive tone from Bank of Japan officials helped reduce some losses, the market still finished the third quarter down.

In contrast, European stocks saw modest gains, with the MSCI UK and MSCI Europe indices gaining 3.4% and 2.1% respectively in local currency. Economic data reinforced the sluggish nature of the eurozone recovery so far this year. The S&P 500 continued its march higher, returning 5.9% over the quarter with US value stocks outperforming their growthier counterparts and a rally in small-cap stocks. This suggests the equity rally broadening away from mega-caps and beyond technology stocks.

In fixed income markets, expectations of lower interest rates led to strong performance, with the Bloomberg Global Aggregate Index (NZD hedged) returning 7.0% in the third quarter. Both government bonds and credit instruments generated strong returns, and emerging market debt surged by 6.1% during the quarter, making it one of the top-performers in fixed income sectors this year.

Glossary of terms

The great rotation: This refers to a big change in how investors choose where to put their money. It usually involves moving money from one type of investment (like bonds) to another (like stocks), based on market conditions and the economy.

Small-cap stocks: This refers to shares of smaller companies with lower market value.

Value sector: This refers to specific industries or companies whose stocks are considered undervalued compared to their earnings.

Mega-caps: These are very large companies with high market capitalisation and influence.

Magnificent 7: Seven major tech companies leading the market's recent growth (2023 and 2024) – Apple, Microsoft, Amazon, Alphabet (Google), Meta (formerly Facebook), NVIDIA, Tesla.

Stocks: These are also known as equities or shares and represent a way to own part of a company. If the company does well, you can earn profits from it, known as dividends.

Bonds: Bonds are loans you give to a company or government. In return, they pay you a set amount of money over a certain period.