February 2009 Investment Brief
The AMP Capital Investors' Investment Brief for the month of February, which provides you with a summary of the key investment markets during the month and updates you on our current outlook for markets.
Highlights from February
It was another shocking month of economic data. The global policy response remained overwhelming, as authorities tried all they could to halt the economic decline. Economic data in New Zealand remained weak. However, in terms of hard data like GDP, exports and industrial production, New Zealand has yet to see the sort of magnitudes witnessed in overseas markets - other than housing activity figures, which remain very depressed.
Turning to the markets, despite the massive policy stimulus underway and the wide range of measures designed to help increase risk appetite and get markets functioning properly again, global sharemarkets remained under significant pressure. The MSCI World Index fell by 8.9% in local currency terms. In New Zealand, the earnings season started and the results were not good. There were many disappointments and few positive surprises. The NZX 50 Index plunged by 9.1%.
Despite the flight to safety, the plunge in sharemarkets and very weak economic indicators, the global bond market wasn't as strong as might have been expected and overall it had a mixed performance. In New Zealand, while there was no Official Cash Rate (OCR) review during the month, the market priced in further significant rate cuts ahead, leading the 90-day bank bill rate to fall by a chunky 47 bps to a new low of 3.20%. The yield curve steepened, as long term rates sold off broadly in line with rates in the US and Australia.
Our outlook for economies and markets
It looks like global economic activity contracted at an equally rapid rate in the March quarter. The global economy will not function properly until the financial system is back to normal and, while authorities are actively trying to bring some semblance of normality back to markets, some strong headwinds remain. We remain hopeful that by the second half of the year, economies are no longer contracting, but it is clear that the global economy will remain weak for some time yet. The New Zealand economy appears to be holding up better than many other economies at the moment. However, it seems only a matter of time before we see weaker global demand and the impact of the fall in commodity prices being reflected in local data. Overall, we see the New Zealand economy contracting in 2009 on an annual average basis and a steady rise in the unemployment rate.
If the run of poor economic data continues, then we are likely to see further downside in global sharemarkets, as investors are betting on some stabilisation of economic activity in the second half, which looks optimistic in light of the recent dataflow. It is still hard to be optimistic about the outlook for shares when credit markets are not functioning properly, but we remain hopeful that next year will be one of economic recovery and the markets should look to begin pricing in a better outlook later in the year. Locally, despite some significant downgrading of earnings during the results season, there remains significant downward risk to these as the economy enters a weaker phase. Some of the beaten up stocks offer potentially high returns once we have visibility on the economic recovery, but it's probably too early to rush into these yet.
Fundamentally, we don't see a lot of value in the bond market. The annual return this year is likely to be small, but yields should remain relatively low this year, with policy rates likely to stay close to zero in the US and Japan for some time, and heading that way in Europe. In New Zealand, at the time of writing, the market had priced in a 75 bps cut to the OCR on March 12 and a further cut of around 25 bps to take the policy rate down to 2.25%, which is very low by New Zealand standards. This should help support the bond market, but further yield curve steepening is likely.
We continue to see downside risk for the NZD, with commodity currencies usually weak in a major economic downturn. The NZD is losing its interest rate support as yields around the world converge to a relatively low level and we have lingering concerns about New Zealand's balance of payments.
Read the full Investment Brief.