7/31/2023 12:00:00 AM

A Message from Mike: Are higher interest rates really working?

A rewarding month

July was a strong month for the funds across the board, and it was great to have the wind at our backs (at last) for the Australasian Funds. Long may it continue. It’s nice to see Pie Australasian Growth and Pie Australasian Growth 2 funds having a good month after a challenging 2022. I feel the new PMs, Michael Goltsman & Michelle Lopez, are getting into their stride now with a bit of ‘room to swing the bat’, as they say. Both funds were up around 5% for the month, and Australasian Growth is now up around 14% YTD. It’s nice to be able to reward clients for their loyalty to Pie with a strong recovery. The good news is that, due to client feedback, we are considering re-opening both those funds as they have available capacity. More details on that in the coming weeks.

On the global front, interest rates continue to march higher with both the FED and ECB lifting rates this month. Our Global and Conservative funds edged higher with smaller gains.

Are higher interest rates really working?

Well, that depends on who you ask and in what country you live in.

In New Zealand, the average mortgage rate in 2022 was around 3.5%. It will be closer to 5% this year, and next year, if rates hold up, it will be over 6%. That’s because most Kiwis tend to only fix for two years. Importantly, from the Reserve Bank's perspective, higher cash rates down under have a relatively short lag time, allowing them to use monetary policy effectively. And so, in the last few months, we have evidenced a slowdown in consumer spending. I’ve really noticed it in the bars and restaurants over the last month. I expect this trend to continue up until the election.

Australia is in a similar boat. June retail sales in Australia fell 0.8% month-over-month. Ben Dorber, ABS Head of Retail Statistics, says,

“Retail turnover fell sharply in June due to weaker than usual spending…This comes as the cost of living pressures continued to weigh on consumer spending.”

Compare this to the US, where most borrowers are on 30-year fixed loans. So whilst the current 30-year rate is around 7%, estimates put the average mortgage rate much lower than this. So the 525 basis points of hikes in the last 12 months are having minimal impact on households, especially when people still have jobs and have been getting pay rises. Under the surface, though, there is some stress in small businesses, who don’t usually fix their loans for long periods and are finding credit hard to come by. We are already seeing a modest tick-up in bankruptcies as a direct impact of this.

Further adding to the confusion, the US government has a number of fiscal stimulus programmes running, making the FED’s job more difficult. Evidence of this was seen just last week, with quarterly GDP coming in hot at 2.4%, or 6.8% annualised. Hardly an economy with the brakes on! Personal consumption spending remains robust, too, and initial jobless claims still scream ‘tight labour market’. No recession here, people. Move along. Eventually of course, higher rates will have a more material impact, but for now, the US stock market still has an earnings tailwind.

The strong economy thesis was confirmed by commentary from the recent reporting season, and bellwether stock Visa had this to say when they reported in July 2023.

“Consumers are still spending especially on travel and entertainment. Consumer spend across all spend from affluent to low spend remained stable since March. Our data did not indicate any behavior change across consumer segments.”


Another spanner in the works is the pent-up savings from COVID lockdowns. Households still have cash available.


All this just means that rates in the US will be higher for longer, and the FED may just have to go again in September.

Investor sentiment

This month's Pie Funds board report included a summary of client in/outflow over the past three years. Unsurprisingly, client inflow peaked in the middle of 2021, a few months before the market top, and then outflow bottomed out only recently, several months after the market turned. 

I have found this to be the case over the years with stock market turns (we now have 16 years of client data to analyse). In particular, the withdrawals often continue after the market has bottomed, and inflow doesn’t resume until around 12 months after the low, once we have posted a good set of 12 months numbers to make everyone feel comfortable again! If it weren’t market-sensitive information, it would be great to share. It’s another contrarian signal I can add to the macro indicators we use.  

Interesting Fact on the Dow Jones

First calculated in 1896, this index is one of the oldest and most commonly followed worldwide, the other being the less widely followed Dow Jones Transportation Average. The index comprises of 30 prominent companies listed on US stock exchanges. Despite its history and gravitas, many consider it an inadequate representation of the overall US market compared to the S&P500. 

The index is price-weighted rather than market cap-weighted – so the higher the price, the higher the weight. United Health is the most significant weight in the Dow at over 10%, not the tech names (which keep splitting their stocks), and Berkshire Hathaway will never be included because it would be 99% of the index. Criteria for inclusion are that it must be headquartered in the US, listed on the NYSE, have a minimum market cap, not a transportation or utility company – and finally – it must help the index gain exposure to desired sectors. The Dow has a committee to determine the components. The final selection by the committee is far more vague: “A stock is typically added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors.”

Annual Report

The Pie Funds Management Scheme Annual Report is now available. This document outlines important information about our funds for the year to 31 March 2023. The Annual report is available on the Pie Funds website, under Investor Documents then Annual Reports. You can request a copy free of charge, which you will receive within 15 working days, by emailing [email protected].

Thank you again for your support. If you have any questions, please don’t hesitate to email me on [email protected]

Mike Taylor
Founder and Chief 
Investment Officer

Information is current as at 31 July 2023. Pie Funds Management Limited is the manager of the funds in the Pie Funds Management Scheme. Any advice is given by Pie Funds Management Limited and is general only. Our advice relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees, like brokerage, if you act on any advice. As manager of the Pie Funds Management Scheme investment funds, we receive fees determined by your balance and we benefit financially if you invest in our products. We manage this conflict of interest via an internal compliance framework designed to help us meet our duties to you. For information about how we can help you, our duties and complaint process and how disputes can be resolved, or to see our product disclosure statement, please visit www.piefunds.co.nz. Please let us know if you would like a hard copy of this disclosure information. Past performance is not a guarantee of future returns. Returns can be negative as well as positive and returns over different periods may vary.