January 2009 Investment Brief
The AMP Capital Investors' Investment Brief for the month of January, which provides you with a summary of the key investment markets during the month and updates you on our current outlook for markets.
Key points
Highlights from January
Economic data continued to indicate that the global economy contracted towards the end of 2008, in response to the freezing up of credit markets. The International Monetary Fund slashed its global growth forecast for 2009 to just 0.5%, a downward revision of 1.7% in just two months. It was clear that all areas of the world were impacted, with big drop-offs in economic activity across the US, UK and Continental Europe. Some of the biggest contractions though were seen across Asia.
The fallout from the global economic crisis continued to impact the local economy. Business confidence (on a seasonally adjusted basis) reached it lowest level ever in the forty year history of the Quarterly Survey of Business Opinion, recording a net -77%.
Turning to the markets, the earnings season for the fourth quarter got underway and it was not a pretty sight, particularly for the financial stocks and companies leveraged to the economic cycle. At the time of writing with less than half of the results in, earnings for S&P 500 companies were down 42% YoY in the fourth quarter. The New Zealand market significantly outperformed global equities in local currency terms, but that belies its true performance, given the plunge in the New Zealand dollar (NZD). Unhedged local investors would have been much better off in global markets.
Following the massive fall in sovereign bond yields during 2008, investors' attention turned to the promises of governments to help bail out the global financial system and stimulate economies, raising concerns about the fiscal cost of these and likely torrent of bond supply .Long bond rates were higher across most the developed world, despite easier monetary policy in some regions. New Zealand sovereign bond rates defied the global trend and moved significantly lower. This was driven by the aggressive stance of the Reserve Bank of New Zealand which slashed the Official Cash Rate by another 150 basis points (bps) to 475 bps and investors coming to terms with the fact that, by global standards, New Zealand rates remained overly high.
Our outlook for economies and markets
Economic momentum remains incredibly weak, and with many indicators already at rock bottom it would seem that there is now limited downside to the likes of business and consumer confidence and other survey based indicators of forward activity. H owever, GDP and industrial production growth will remain negative over the next quarter. Rate cuts will remain a theme in those countries that have scope to lower them further, and in other cases central bank balance sheets will be expanded as a measure of further monetary stimulus, while governments are likely to adopt further fiscal stimulus measures. The best we can hope for is that these widespread policy initiatives lend some support for economies in the second half of the year. The New Zealand economy is likely to be mired in recession for several months yet, but the significant policy stimulus should be working by the second half. That said, the economy is expected to contract on an annual average basis over 2009 and widespread job losses will ensue.
One positive is that despite the barrage of negative news, the lows of November for shares have yet to be breached, suggesting that much negative news has already been priced into stocks. That said, given the awful economic environment, it is hard to be optimistic about the outlook with conviction, although the range of monetary and fiscal stimulus still provides some hope for better returns over 2009. Locally, the earnings season gets underway in earnest in February and that should lead to further significant downgrades in earnings. Beaten up cyclicals offer much better value, but at much higher risk of course, than defensive plays.
We expected higher interest rates over the course of the year and still do, although the US Federal Reserve's hints that it might purchase Treasury bonds to keep interest rates low is a supporting factor for the market. Further rate cuts are highly likely in the UK, Europe and Australia. Interest rates in New Zealand have fallen a long way but compared to other countries rates remain high. The market is pricing in further OCR reductions over coming months, with a terminal rate of circa 2.25% now priced in. This should help support the long end of the market although, as with global rates, long bond rates have more potential to rise than fall over the remainder of 2009.
Despite the significant downward correction to the NZD over the past year, we continue to see further downside risk, with commodity currencies usually weak in a major global economic downturn.
Read the full Investment Brief.