Key market movements
Global equities rebounded in August with the MSCI ACWI (NZD unhedged) returning 2.0%, and the NZD-hedged flavour of the same index returning 2.3% over the month. Returns on a trailing 12-month basis remain healthy, sitting at 22.0% and 21.1% respectively.
The New Zealand market was also up on the month, with the S&P/NZX 50 Gross Index (including imputation credits) returning 1.7% over the month. Australian equities were also positive, with the S&P/ASX 200 Index up 1.5% in Australian dollar terms, and a weakening New Zealand dollar contributing to a 2.8% return in NZD terms.
Fixed income returns were broadly flat. The Bloomberg NZ Bond Composite Index returned 0.1%, while the Bloomberg Global Aggregate Bond Index (hedged to NZD) ended the month at 0.0%.
Key developments
Global equities recovered in August as economic activity remained firm and company earnings continued to support markets. Technology regained momentum after July’s sell-off, although leadership was broader than semiconductors, with software companies also benefiting from solid results. Resources joined the advance as precious and industrial metals moved higher. The backdrop was not uniformly benign. Tension in the Middle East kept oil markets unsettled, while disruption risks supported agricultural commodities and European natural gas prices. Corporate fundamentals nevertheless proved resilient enough for equities to absorb both the geopolitical uncertainty and higher bond yields.
The message from Jackson Hole was less reassuring for bond investors. Federal Reserve Chair Kevin Warsh made clear that inflation remains the priority and that stronger evidence of progress towards target will be needed before the Fed can contemplate a softer policy stance. This landed against an economy that continues to perform well, leaving the Fed with less reason to look through inflation than some other central banks. Yields remained sensitive to policy rhetoric and energy prices, although the US Treasury’s plans to increase longer-dated bond buybacks provided some support at the long end of the curve.
China continues to operate at two speeds. Exports and industrial activity are benefiting from AI-related demand, but the household economy remains subdued as falling property prices and employment concerns weigh on confidence. Authorities appear prepared to accept a slower expansion while this adjustment continues. For New Zealand, the distinction matters. Weak Chinese consumption does not translate neatly into weak demand for every export, and demand for high-quality protein remains supported by a growing middle class that continues to prioritise this spending.
Closer to home, restrictive monetary policy is becoming more visible in Australia, where housing activity and discretionary spending are slowing while persistent core inflation limits the RBA’s room to respond. New Zealand’s recovery is also uneven, although the mix is different. Exports, tourism and education remain the brighter areas, and business investment is beginning to recover. Households are still cautious, with a stagnant housing market, elevated unemployment and cost-of-living pressure holding back spending. The RBNZ’s early-September increase in the OCR was accompanied by a more measured signal on further tightening, reflecting that tension between inflation risk and weak domestic activity.
What to watch
The surge in global semiconductor sales reflects the extraordinary scale of AI-related investment. NVIDIA's GPUs remain the critical compute engine behind AI models, while memory suppliers such as SK Hynix have become equally important as demand for High Bandwidth Memory (HBM) accelerates. What began as a GPU story has evolved into a broader semiconductor cycle encompassing memory, storage, networking and advanced packaging. Hyperscaler capital expenditure growth rates are still rising. As Jensen Huang recently noted, demand is continuing to outstrip supply in key AI components, with bottlenecks in production more likely to be the limiting factor for sales.
Source: SIA, Macrobond, Harbour Asset Management.
Market outlook and positioning
Economic resilience and solid earnings have allowed global share markets to withstand higher bond yields so far. That has surprised many investors. Markets entered the year worried that tighter monetary policy and elevated valuations would constrain returns, yet earnings growth has remained strong and broadened beyond a small group of technology stocks. August was a good example. Software companies participated alongside semiconductors, small caps outperformed, and earnings strength extended into areas such as energy and materials. We think that broadening is important. Markets driven by a wider group of companies and sectors are generally healthier than those dependent on a handful of leaders. Higher yields do raise the hurdle for valuations, but they may also reflect firmer growth and improving productivity rather than inflation alone. Having said that, the range of outcomes remains wide.
A solid New Zealand earnings season provided cause for some confidence on select company prospects, although there is little evidence of a broad domestic recovery. Cost reduction and productivity programmes are beginning to produce better operating leverage as even modest revenue growth moves ahead of costs. Balance sheets generally remain sound, and dividend announcements were supportive. Management guidance was still conservative, reflecting mixed activity and wider geopolitical uncertainty. With market earnings expectations modest, some of that caution may eventually prove excessive, particularly for businesses already doing the operational work needed to lift returns.
Australia looks less straightforward despite the generally constructive global backdrop. Resources and selected healthcare and technology businesses retain useful earnings support, while domestically exposed companies are contending with slower housing activity, cautious consumers and higher funding costs. Reporting season showed that headline earnings growth can obscure a weaker underlying trend when much of the improvement is concentrated in mining. We expect earnings outcomes to diverge further as restrictive monetary conditions work through the economy. That should create opportunities, but broad market exposure offers less protection when valuations remain elevated and earnings forecasts are being revised lower. The case for selectivity is stronger than the case for the market as a whole.
For the equity growth funds, our approach remains to be patient, selective and positioned for a range of potential outcomes. We continue to favour companies capable of delivering earnings growth that is both stronger and more durable than market expectations imply. Over the medium term, we expect structural forces such as digitisation, demographic change, deglobalisation and the transition in energy systems to remain important drivers of company earnings, even if the path is not always linear. In that context, the portfolio retains an overweight position in healthcare, where we see attractive opportunities across New Zealand retirement villages and Australian pharmaceutical and diagnostic businesses with long-duration growth characteristics. We also remain overweight financials, reflecting exposure to companies such as Infratil, AMP and Macquarie that may benefit from data centre investment, alternative energy development and improved transaction activity. Within consumer staples, we continue to see upside in businesses such as a2 Milk and Scales, where company-specific drivers may support earnings growth. Offsetting these positions, the portfolio remains underweight utilities, communication services and real estate. In each case, we see a less compelling balance between valuations and earnings prospects, with gentailers facing higher earnings uncertainty, telecommunications operating in a competitive environment, and property companies generally offering more modest growth outlooks.
In fixed interest, the market has taken a degree of comfort from the Reserve Bank’s almost excessively explicit intent to hike in December and then again in 2027. This modest hiking path implies some value in market yields across 1 to 3 year maturities, where expectations for rate hikes sit closer to 4%. We are being circumspect about investing into this idea, as scope for higher global yields can spill over into the domestic market. Long-term bond yields globally have continued to face pressure from a combination of large fiscal deficits, elevated government borrowing requirements and concerns that inflation may prove more persistent than central banks currently anticipate. Given this backdrop, portfolios continue to maintain a defensive bias towards long-dated duration exposures and retain short positions in parts of the longer end of the yield curve.
In multi-asset funds, we are modestly overweight growth assets. This is composed of a meaningful overweight to global equities that is partially offset by an underweight to Australasian equities, based on relative earnings prospects. We feel global equities should outperform Australasian equities given the US (which makes up almost 70% of the MSCI ACWI) has much better earnings and economic momentum. We remain underweight global fixed income where there is greater fundamental support for higher yields. We are neutral NZD as the currency appears close to fair value on our short-term model.
In the Income Fund, we have been retaining our core views for some time. We are holding a slightly underweight equity allocation, while the fixed interest strategy aligns with that being applied in our other fixed interest portfolios. Active positions include being overweight the NZ Dollar versus the Australian Dollar and also retaining holdings in inflation-indexed bonds. At a broad level, wariness about the scope for higher global long-term bond yields is behind a strategy that has been cautious over recent months.
IMPORTANT NOTICE AND DISCLAIMER
This publication is provided for general information purposes only. The information provided is not intended to be financial advice. The information provided is given in good faith and has been prepared from sources believed to be accurate and complete as at the date of issue, but such information may be subject to change. Past performance is not indicative of future results and no representation is made regarding future performance of the Funds. No person guarantees the performance of any funds managed by Harbour Asset Management Limited.
Harbour Asset Management Limited (Harbour) is the issuer of the Harbour Investment Funds. Copies of the Product Disclosure Statements are available at https://www.harbourasset.co.nz/our-funds/investor-documents/ Harbour is also the issuer of Hunter Investment Funds (Hunter). A copy of the relevant Product Disclosure Statement is available at https://hunterinvestments.co.nz/resources/.
Please find our quarterly Fund updates, which contain returns and total fees during the previous year on those Harbour and Hunter websites. Harbour also manages wholesale unit trusts. To invest as a wholesale investor, investors must fit the criteria as set out in the Financial Markets Conduct Act 2013.