Salt Adjusts Exposure to Underperforming NZ Equities

Highlights:

• Reduced Exposure to NZ Equities: Salt Funds Management has decreased its exposure to New Zealand equities in both its Sustainable Growth and Sustainable Income Funds due to the local market's underperformance.
• Market Performance: The NZ equity market experienced a 3.2% loss in the June quarter, reversing a 2.8% gain from the March quarter, resulting in slightly negative returns for 2024 year-to-date and the past year.
• Strategic Adjustments and Predictions: Salt anticipates the RBNZ will cut its official cash rate in November, which may lead to a recovery in NZ equities by mid-2025. The Sustainable Growth Fund is currently underweight by 7%, while the Sustainable Income Fund has reduced its NZ shares weighting to 44%.

Salt Goes Lighter on NZ Equities in Growth and Income Funds

Salt Funds Management has taken a cautious stance on New Zealand equities, reducing exposure in both its Sustainable Growth and Sustainable Income Funds. This adjustment comes as the local market continues to lag behind major global equity markets.

Market Performance and Outlook

In its latest Global Outlook commentary, Salt highlighted a 3.2% loss in the NZ equity market for the June quarter, negating a modest 2.8% gain from the March quarter. This decline has resulted in slightly negative returns for 2024 year-to-date and over the past year. Salt attributes this performance to the Reserve Bank of New Zealand's (RBNZ) stringent monetary policy and deteriorating domestic sentiment.

“There is simply no real catalyst at present for a recovery in performance by the NZ equity market," Salt stated. The firm suggests that the best approach is to incrementally accumulate quality cyclicals in anticipation of a potential recovery when the RBNZ eases its policy, which is expected by mid-2025.

Strategic Adjustments

Salt predicts the RBNZ will cut its official cash rate, currently at 5.5%, in November, aligning with a growing consensus among economists. This anticipated shift could prompt investors to allocate more to NZ shares by year-end. However, Salt cautions that the substantial outperformance of international shares over domestic equities means institutional asset allocators will likely remain cautious about increasing local exposure.

The Salt Sustainable Growth Fund currently underweights NZ equities by 7% relative to its strategic allocation. The fund aims to outperform the NZ CPI by 5% over a rolling five-year period, necessitating a strategic tilt away from underperforming asset classes.

Income Fund Adjustments

Similarly, the Sustainable Income Fund has reduced its NZ shares weighting to 44%, down from nearly 50% at the beginning of 2024, though it remains above its strategic neutral level of 37.5%. Salt justifies this by pointing to the significant dividend yield advantage from stable, well-established domestic companies.

As local equities continue to underperform both domestic bonds and bank bills, Salt's cautious strategy reflects its commitment to optimizing returns while navigating challenging market conditions.

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