We’re on the home stretch and 2023 has been a surprisingly good year for investors.
Conservative assets have returned to form, with New Zealand corporate bonds up 5.1 per cent this year.
World shares have also been strong, returning 17.8 per cent (including dividends) which is well above the long-term average.
In contrast, the local sharemarket has been a notable laggard, with the NZX 50 flat with just two weeks to go.
Our market is heavily weighted to defensive businesses that pay attractive dividends, such as real estate, infrastructure and utilities.
These sectors are particularly sensitive to changes in interest rates, so we might need to see some respite on that front before they start performing well again.
In the eyes of financial markets, that’ll happen next year.
Current pricing suggests a cut in the Official Cash Rate by July or August, while in the US, UK and Europe declines could come earlier still.
Our Reserve Bank begs to differ, and it sees another hike as more likely than any cuts in 2024.
The interplay between inflation, migration and the labour market will be a crucial determinant of who is right.
Internationally, politics will be a major theme in the coming 12 months.
The main event will be the US election in November. It’s shaping up as a presidential rematch between Joe Biden and Donald Trump, the first since 1956.
More often than not the incumbent party wins, with the odds rising to almost 70 per cent when a sitting President is running.
That puts Biden in the box seat. However, his approval ratings are very low and if the US economy stumbles things will quickly swing back into Trump’s favour.
The Taiwanese election on January 13 is also worth keeping an eye on.
The two leading opposition candidates have formed a joint presidential ticket, which increases the likelihood of a pro-mainland regime being inaugurated in May.
That would allow China to make progress integrating Taiwan without the use of force, which might reduce near-term geopolitical risks.
Turning back to markets, it’s always a challenge to predict what’s ahead and 2024 will be no different.
Lower inflation and falling interest rates are unambiguous positives, especially for fixed income which should have another solid year.
The outlook is murkier when it comes to shares, because a tailwind of easing monetary policy could be offset by weaker growth.
It’s certainly not inevitable, but some indicators still point to recessionary risks on the horizon for some economies.
If these prove accurate, forecasts for global earnings growth of more than ten per cent in 2024 could be too high.
A challenging year would likely see larger companies outperform smaller ones, and defensive and growth stocks hold up better than their more cyclical (and economically sensitive) counterparts.
That sort of backdrop could mean another good year for the US, given its sector makeup.
The US dollar typically remains resilient during periods of weakness, which is another reason local investors should maintain a healthy exposure to the world’s biggest sharemarket.
The New Zealand sharemarket looks well-positioned, with a plethora of stable businesses, a high sensitivity to any fall in interest rates and the fact it’s lagged most other markets this past year.
This year has been stronger than most people predicted and – provided they were well-diversified – investors should’ve done well.
We’re not out of the woods yet though, and it’s too early for central banks to declare victory.
For investors, it would be wise to hedge your bets in 2024.
Being too cautious is just as risky as being overly optimistic, and adopting a defensive stance is more sensible than running for the hills.
After all, things might well turn out better than many expect, just like they have this year.
Market Insights enewsletter
Keep up to date with our fortnightly Market Insights enewsletter. Our research team provide timely and regular commentary and analysis on market developments, understanding investment jargon, and the impact of current events.
Mark Lister
Investment Director
Market Insights enewsletter
Keep up to date with our fortnightly Market Insights enewsletter. Our research team provide timely and regular commentary and analysis on market developments, understanding investment jargon, and the impact of current events.