SHARE THIS

New Zealand equities benefitted from dovish signs on interest rates in July

July was a remarkably strong month for New Zealand equities when looking at the S&P/NZX 50 Index on a stock-by stock basis. As of 24 July, for example, 45 of the index’s 50 stocks were up and 18 of those were delivering double-digit returns. This is clearly an unusual situation, in our view. The strength of the market partly reflected the dovish turn taken by the Reserve Bank of New Zealand (RBNZ) in its latest Monetary Policy Review on 10 July. Although the RBNZ kept New Zealand’s Official Cash Rate unchanged at the elevated level of 5.5%, the summary record of its policy meeting demonstrated a more dovish tone than previous monetary policy announcements in several key respects. As an example, no mention of the possibility of further tightening was included in the summary. Another notable feature was the inclusion of confident wording stating that inflation is likely to return to the RBNZ’s target range of 1-3% per annum in the second half of 2024.

Market also impacted by rotation from large caps to smaller stocks

In our view, the dynamics seen in New Zealand’s stock market in July also reflected a phenomenon often referred to as a rotation in which investors sell holdings of large-cap stocks to fund purchases of small- and mid-cap names. A notable example of this has recently been seen in the US, where investors have increased the breadth of their investments by selling high-performing, mega-cap technology “Magnificent Seven” stocks to shift their money into smaller stocks. One driver of this trend is thought to be the prospect of lower interest rates, as smaller companies are generally more dependent on borrowing than larger names, which are more able to use cash flows to fund operations. In New Zealand’s case, the underperformers were the names perceived to be safe, large and liquid that had previously been used as safe havens by investors who seek refuge in those stocks during difficult macroeconomic times. A significant amount of rotation occurred, with investors using sales of those safe-haven stocks to fund moves into small- and mid-cap names as a way of shifting into cyclicals, housing-related stocks, financials, industrials, and stocks with consumer exposure.