A mid-year wrap, and a look ahead to the second half

It was a lucrative first six months of the year for investors.

World shares rose 10.3 per cent with major indices in the US, UK, Europe, Japan and Australia hitting new record highs.

Returns from all those markets (bar Japan) were higher still if one accounts for currency moves, with the NZ dollar notably weaker against the US dollar and British pound.

In contrast, local shares haven’t fared as well.

The NZX 50 index slipped half a per cent in the first half and is almost 14 per cent below its early 2021 peak.

House prices have been equally lacklustre, falling slightly this year after going sideways in 2023.

Fixed income has performed better, with the NZX Investment Grade Corporate Bond Index returning 1.8 per cent in the first half.

Those with diversified portfolios will have enjoyed solid returns so far in 2024, provided they’ve had a healthy weighting to offshore assets, rather than being concentrated in New Zealand.

Looking ahead, there’s plenty to watch.

Interest rates will be a key focus, as inflation pressures continue to ease in most of the major regions.

During the first half the Bank of Canada and European Central Bank cut interest rates for the first time this cycle.

Markets expect similar moves in the US, UK and New Zealand over the balance of the year.

Provided economic activity holds up, this should make for an encouraging investment backdrop.

However, we need to keep a close eye on the labour market, in case unemployment rises more significantly than hoped.

A bit of slack is helping the inflation picture, but too much could push some economies into recession.

I wouldn’t call that a base case, but it requires monitoring.

Here in New Zealand, we’re facing such challenges already.

Businesses and consumers are under pressure, unemployment is rising and house prices have declined in four out of the past six months.

Recent surveys point to a slump in activity, but with firms’ pricing intentions showing an equally sharp decline.

While unpleasant, these conditions are necessary for the Reserve Bank to feel comfortable reducing the Official Cash Rate (OCR).

We’ll here from the Reserve Bank on Wednesday next week, and markets will be looking for any signs of a change in tone.

Most economists still think OCR cuts are a 2025 story, although financial markets expect at least one this side of Christmas.

That might give local shares a boost, even if the landscape remains fragile at that point.

The sharemarket is not the economy, after all.

Many of our listed companies are stable, resilient businesses paying steady, reliable dividends.

Fixed income should be a clear beneficiary, and levels of income having improved dramatically from a few years ago.

One can lock in yield of 5-6 per cent for more than three years from exclusively investment grade securities.

That offers conservative investors, or others nervous about the outlook, a good balance of risk and return.

Beyond our shores, politics will increasingly be in focus.

The US election in November is shaping up as the main event, after plenty of action in the UK and Europe of late.

Joe Biden’s odds of winning have tanked since his disastrous debate performance, and the election outcome might now hinge on whether he is willing to step aside or not.

More immediately, the US quarterly reporting season kicks off next week and the high-flying artificial intelligence (AI) stocks will again be in focus.

After a spectacular run, investors are grappling with high valuations while trying to ascertain how long stellar the earnings growth can continue.

Although not as highly priced as it was during the COVID-era or the late 1990s and early 2000s, the US market is more expensive than its long-term average.

Analysts expect aggregate earnings growth of 11 per cent this year from the S&P 500, accelerating to more than 14 per cent in 2025, in part driven by developments in AI.

Time will tell if that’s ambitious.

For savvy investors, the performance gap between the market leaders and the rest could be offering up attractive opportunities.

The technology and communication services sectors – where Microsoft, Apple, NVIDIA, Meta and Alphabet reside – rallied more than 25 per cent during the first half.

None of the other eight S&P 500 sectors managed a double-digit return, and the average increase was a much more modest 5.7 per cent.

As always, there is cause for optimism over the balance of the year, mixed with signs we could be in for more volatility.

From where I sit, there are more reasons to stay invested rather than sit on the sidelines, as long as you cover your bases across asset classes, regions and sectors.

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