Market Update: AI is Coming, Tax Policy Changes and Boring Investing is Back  

A new calendar year is cause to reflect on what’s been and where we’re headed. In the instance of markets, there’s a lot to reflect on this quarter.

Whilst 2023 was a rollercoaster year for NZ capital markets, it was great to see the S&P/NZX 20 index ending the year +3.5%, thanks to an increase of 4% in December. The first positive calendar year results for the NZX since 2020. 

Rising central rank rates continued to impact investor sentiment and contributed to a 10-year low in NZX trading values across equities and debt.

Should interest rates persist at elevated levels, the interest rate sensitive NZX may continue to experience a sluggish market dynamic.

This could present difficulties for active managers in executing their strategies, especially considering the capacity limitations posed by large fund sizes, in relation to the local market trading volumes and the sizeable portion of daily value traded concentrated in the closing market auction.

A previously proposed trust beneficiary tax rate increase to 39% could come into effect for the new financial year, a key focus in Q1 for investors is ensuring their tax structure is right for the new financial year.

These potential changes, along with the top Resident Withholding Tax (RWT) rate at 39%, have prompted investors to reevaluate investment structures. Many groups and investors, particularly within equities and higher yield strategies, are shifting to Portfolio Investment Entities (PIEs) for the new financial year, which offer a maximum 28% tax rate.

A difference of 11% in income tax is very meaningful for a number of clients, spotlighting the significance of this proposed change and need to adapt and avoid tax leakage.

We’ve said it multiple times before, and we will say it again – cash remains king in today’s economic environment.

Throughout 2023, global markets grappled with the possibility of inflation persisting, and unexpectedly robust economic data. However, in Q4, the bond market began predicting interest rate cuts as inflation has seemingly become less concerning.

It seems likely that the central banks will cut interest rates in 2024, but the question remains as to how easy it will be to return inflation back to target. Therefore, it's likely that the OCR will stay elevated relative to recent levels.

Accordingly, with higher yields, investors saving and borrowing patterns have adjusted. They have flocked to cash products - cash funds and short dated term deposits - given the attractive returns relative to risk, and the flexibility to respond to market opportunities. 

As everyday investors increasingly demand fixed income products, it is important to understand the differences between cash funds, term deposits and cash management accounts, and how these can be optimised for client returns.

The global bond markets have fast adapted to the recent era of elevated interest rates, aligning bond valuations more closely with their fair value.

The rise in long-term rates and term premiums has notably increased bond return expectations, presenting appealing opportunities for investors with a long-term perspective and an “old-normal” mindset.

The frenzy around meme stocks and retail trading has also waned, signalling a return to more traditional long-term investor behaviours, and a desire to keep things simple in the year to come.

There's a growing preference for high-quality, well-diversified funds and investment strategies, like portfolios comprising index funds. Notably, in the US, even millennials are increasingly investing in fixed income funds, reflecting a shift in investment preferences across generations.

2024 marks a big year for ESG investing. We’re set to see the debut of climate-related disclosure (CRD) reports from New Zealand's asset managers, plus the emergence of Modern Slavery as a significant aspect of ESG considerations.

A wide range of financial entities, including banks, insurers, non-bank deposit takers, NZX-listed companies and asset managers will now be mandated to produce CRD reports. Asset managers need to generate specific scenario analyses for each fund.

The new reporting requirements are set to elevate the visibility and media attention on sustainability issues within the financial services sector, highlighting the industry's role in environmental stewardship.

Modern Slavery as an ESG consideration is a major legislative focus in Australasia and will introduce an array of new compliance and reporting duties for the financial sector.

Not to be overlooked as a key focus area for 2024, ESG impacts both investors and advisers alike. As existing and potential clients start to see CRD reports from KiwiSaver and fund managers in their inboxes, they'll likely expect to learn more from their adviser.

Lastly, we can’t forget the elephant in the room – Artificial Intelligence or AI.

Will it fundamentally disrupt the white-collar financial services workforce?Or is it simply going to support greater efficiency and productivity, enabling firms to service a broader range of clients with greater personalisation?

Will it be large language models synthesising expert response and advice with risk of hallucination or misinformation or will every picture need to be scrutinised whether real or CGI?

No matter what, AI has the ability to alter the way services are delivered and everyone needs to be monitoring the risks and opportunities it creates.

For example, AI is poised to play a crucial role in optimising investment portfolios. By analysing vast datasets, including market trends, economic indicators, and historical performance, AI algorithms can identify optimal asset allocations, adjusting portfolios in real time to maximise returns and minimise risks, tailored to individual investor profiles.

Food for thought as to how AI can enable the future of your firm and intended outcomes for clients.