New Zealand Equity Monthly August 2024

By Michael Sherrock, Head of Equities, Nikko AM

Global markets have been volatile amid changing interest rate cut expectations

Global equity markets showed significant volatility in recent months as they reacted aggressively to comments from central banks and economic data amid anticipation over interest rate cuts. At the same time, economists and forecasters were proactive in responding to changing data by adjusting the timing and size of their rate cut expectations, thereby contributing to further market movements. One notable example is the US market, which whipsawed on contrasting economic data as market participants searched for signs of the likely timing and pace of rate cuts by the Federal Reserve. The Reserve Bank of Australia (RBA) was a significant outlier in this environment. In its latest monetary policy statement (dated 6 August), the RBA left its cash target rate on hold at 4.35% and indicated that Australia is unlikely to see rate cuts in the near future, citing above-target inflation and uncertainty in the economic outlook.

RBNZ already on looser monetary policy track with August rate cut

In contrast, the Reserve Bank of New Zealand (RBNZ) has been taking a more dovish stance since July. In a media release published on 10 July, the RBNZ signalled a pivot away from monetary tightening by stating that monetary restraint “will be tempered over time consistent with the expected decline in inflation pressures”. New Zealand equities reacted positively to the change, with the S&P/NZX 50 Index of the 50 largest names on New Zealand’s Exchange ending July approximately 6% higher. The RBNZ followed up its change in tone with a quarter-point reduction in New Zealand’s Official Cash Rate (OCR) in the central bank’s Monetary Policy Statement on 14 August. The cut from 5.5% to 5.25% marked the first change in the OCR since a quarter-point hike in May 2023. Given that New Zealand equities rose by approximately 2% on the day of the August rate cut, the future trajectory of the OCR will be an important consideration for the stock market. The RBNZ projects that the OCR will have fallen to the 3% level by mid-2027.

Monetary policy seen as positive for equities given market’s rate sensitivity

Given the S&P/NZX 50 Index’s composition, the New Zealand equity market is particularly sensitive to movements in interest rates. One of the largest sectors in New Zealand’s market is real estate, which has significant sensitivity to interest rates due to the impact of mortgages on real estate demand and prices. Another example of a sector with a large weighting in New Zealand’s market is the retirement sector, which is impacted by interest rates through its link to the residential housing market. The current direction of interest rates suggests that monetary policy could be a positive for New Zealand equities going forward.

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