Outlook for Investment Markets
Local and global shares and property will continue to face challenging times because of a worse-than-expected economic outlook and the ongoing credit crisis. Fiscal and monetary policies at home and overseas are highly stimulatory, and should lead to a better 2010, but in the interim investors are highly risk-averse. This is leading to high prices for 'safe haven' assets such as government bonds and gold, sharp selloffs for weaker assets such as companies with financing issues or profit disappointments, and high levels of volatility in many markets.
Australasian Equities - Outlook
Australia and New Zealand appear at first glance to be in the same boat as many other recession-facing developed economies. Consumer and business confidence have both turned markedly for the worse, some measures in the National Australia Bank's business survey for Australia and the National Bank business survey in New Zealand hitting all-time lows. Indicators such as firms' planned investments and hiring intentions have softened markedly, suggesting more difficult times ahead. The New Zealand survey showed 40.0 percent of respondents to be pessimistic about their profits, a very high level by historical standards.
So far, however, the extent of the slowdown has been more modest in New Zealand and Australia than in many other developed economies, although scare stories about factory closures and job losses have begun to hit the headlines in Australia. Whatever slowdown lies ahead - forecasters have increasingly pencilled in a mildly recessionary 2009, but a better 2010 - it's likely to be cushioned by aggressively eased monetary and fiscal policies, a more competitive $A, and stronger banks than in many other countries. Cheap valuations and a dividend yield in the 6.0 - 6.50 percent range suggest that local shares are at present the best of the growth asset classes.
International Equities - Outlook
The immediate economic outlook will remain the key influence on world sharemarkets. The impact of the credit crisis and the scale of the unwinding of previous excesses in property and sharemarkets have had a greater-than-expected impact on the economic outlook, which is now considerably weaker than seemed likely at the start of this year. The British economy shrank by 1.50 percent in the December quarter alone, while Japan suffered a 3.30 percent fall in GDP for the same quarter. This was Japan's second-worst quarterly outcome in modern times, and forecasts for the current March quarter are for another large contraction. In the US, the latest consensus forecast is that the economy will shrink even faster (4.60 percent at an annualised rate) this quarter than in the fourth quarter of 2008 (3.80 percent). Assuming that the credit crisis doesn't spring any further unpleasant surprises - perhaps an optimistic assumption - very loose monetary policy and strong fiscal stimulus (such as the massive US$787.0 billion package) will lead to an improvement in economic activity later this year. Even so, shell-shocked sharemarkets are unlikely to take much on trust in coming months, and more likely to continue to remain focused on the ongoing downside risks.
New Zealand Property - Outlook
Sharebrokers' estimates of the grossed-up yield from the New Zealand listed property sector are 14.50 - 15.0 percent. The trusts also continue to trade at substantial discounts to net assets, prices averaged across the whole sector currently around two-thirds of NTA (with wide variations from one name to the next). These apparently generous valuations hide the fact that there will be asset writedowns as weaker economic conditions hit, and that current distribution levels are unlikely to be maintained. (Some trusts have already wound back their payouts.) Even making allowance for forthcoming revaluations and dividend cutbacks, however, the sector continues to offer good value compared to the sharemarket as a whole.
Australian & International Property - Outlook
The renewed selloff in the domestic listed property sector had various reasons. These included a string of proposed dividend cuts, large reported losses from asset writedowns (notably Macquarie Office's A$1.08 billion loss), ongoing uncertainties over refinancing for the more leveraged vehicles, and the worsening economic outlook. Westfield's A$2.90 billion capital raising not only resulted in a dilution of the Westfield share price, but also led to widespread selling of other trusts to fund buying the new Westfield shares. One fund manager was quoted in the Sydney Morning Herald on 26 February saying "the trusts have turned toxic and large overseas and local buyers have become determined sellers". Barring some catalyst to relieve this pessimism, the sector will remain under pressure.
It's the same story for international property - cuts in distributions, asset writedowns, balance sheet issues, a weaker economic outlook - with some tweaks according to region. In the US, some large REITs started to pay their dividends in shares instead of cash, again diluting the price and worrying investors that the practice might spread. There are good operating assets behind many of these companies, and sharply lower interest rates ought at some point to encourage a renewal of buying interest, but investor confidence is shot for the time being.
New Zealand Cash & Fixed Interest - Outlook
The Reserve Bank stated on 29 January that "the news coming from our trading partners is very negative", and that "we now expect the impact on New Zealand of these developments to be greater than we did in December". The Bank may yet ease a bit more, although it also said that any further reductions would "be smaller than those seen recently". The financial markets think so: their best guess is that the Bank will have to ease again by mid-year by about 0.50 percent. Government bond yields look set to remain low as a safe haven asset, and corporate bond yields high on worries over financial fragility, while the credit crisis continues to unfold. The outlook for the $NZ remains uncertain in an environment where currencies remain vulnerable to sudden shifts in sentiment: the yen, for example, dropped by 7.60 percent over the past month alone.
Australian Cash & Fixed Interest - Outlook
The minutes of the Reserve Bank's 3 February meeting showed that the Bank expected an eventual improvement after easier monetary policy and higher government spending had kicked in, but that in the meantime "the short-term prospects were… still for weakness in demand and output". The Bank is therefore likely to leave short-term interest rates where they are, and may have to ease again by mid-year, at which point the easing cycle should be complete. As is the case in New Zealand (and globally), government bond yields look set to remain low, and corporate bond yields high. The outlook for the $A is similar to that of the $NZ, vulnerable to sudden shifts in sentiment.
International Fixed Interest - Outlook
The outlook for international fixed interest is for more of the same: very low cash and money market rates as central banks run loose monetary policies; low government bond yields because of risk-averse investor demand and an economic outlook for slow growth and low inflation; and relatively high corporate bond yields because of worries about corporate health. This might change if the credit crisis was seen to be finally corralled, but with the US bank rescue plan still very much a work in progress, it seems premature to call an end to the ongoing financial instability.
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Performance periods refer to the month and three months to 26 February 2009.