Economic Commentary September Quarter 2023


  • Most asset classes suffered negative returns in the September quarter.

  • The short end of the yield curve is offering compelling opportunities for bonds.

  • Global equities have the strongest returns YTD; elsewhere performance is modest.

  • Short duration and alternatives have been key contributors to portfolio returns.

  • Asset class diversification reduces portfolio risk for a given return.

  • Diversification occurs because markets have different drivers of return, they are not perfectly correlated.

  • The best source of diversification is time, which is why having a long term horizon is so important.

The strong first half of calendar 2023 gave way to a pull back in the September quarter. Most conventional asset classes suffered negative returns, including global and NZ equities, global and NZ fixed income, and listed property and infrastructure. In contrast, cash and short-term bonds fared relatively well, as did select alternative asset classes.

The main factor behind the sell-off is concern that interest rates need to be higher for longer. While inflation has been trending lower, it is still higher than central bank targets. Economic growth and employment levels have also stayed stronger than anticipated in many countries, including New Zealand, Australia and the United States. The silver lining is that this has reduced the chances of a large slump in economic activity, which is ultimately much worse for asset prices than a pull-back caused by activity being stronger than expected. In addition, higher interest rates mean that the portfolios now have much higher income yields than they had a year or two ago. This source of return is much more certain (less risky) over the short term than the return from capital gains.

To read the full commentary please click on the file link