Outlook for Investment Markets
The past several months have seen increased investor confidence that the global credit crisis and world recession may be drawing nearer to an end. Safe haven assets have consequently been sold off, and growth-linked assets have done well. The speed and scale of these trends means that a fair proportion of the benefits of expected recovery has already been factored into asset prices. There could well now be a period when investors wait to see that their more positive expectations are validated by improved economic and financial conditions.
Australasian Equities - Outlook
The sluggish improvement in local shares can be explained by a longer and deeper recession developing than had been expected previously. Latest (June) consensus forecasts collated by the New Zealand Institute of Economic Research show that GDP is now likely to fall by -1.60 percent in the year to next March. Only three months ago, the same survey had been picking a more modest -0.60 percent fall. This makes the outlook for the New Zealand economy more downbeat than for Australia, where going by latest forecasts, there will be a smaller fall in GDP growth of -0.70 percent this calendar year. On a more positive note, however, the turnaround in the cycle is not too far away: forecasters are picking 1.50 percent growth for Australia in 2010, and 2.80 percent for New Zealand in the year to March 2011. Although both share markets have already priced in the expected recovery well in advance - price/earnings ratios, for example, have risen well above their panicked lows earlier this year - recession turning into a non-inflationary recovery is the sort of backdrop where shares could be expected to continue to do well.
International Equities - Outlook
The economic and financial outlook remains uncertain, and there are clearly still downside risks. At the time of writing, for instance, world share markets had just been rattled by a World Bank forecast that the global economy would contract by 2.90 percent this year, worse than the 1.70 percent the Bank had been picking earlier this year. On balance, however, most of the recent data has been on the positive side. US forecasters, for example, continue to pick that the recession will bottom out during this June quarter, and that the September quarter will see a return to (modest) growth at an 0.60 percent annual rate, picking up to 1.90 percent in the December quarter. Recent business confidence surveys out of Germany and Japan have also pointed to better (or at least, less bad) prospects ahead. There's also more confidence that China's economy will provide greater support to world trade, the consensus forecast for this year's GDP growth now up to 7.50 percent. Share markets are still vulnerable to any further twists to the credit crisis and to any bearish reassessments of the global economic outlook, but the most likely course is that markets will hold current price levels until they see further evidence that the cycle has indeed started to turn for the better. At that point we could see world share markets advance further.
New Zealand Property - Outlook
Although not savaged by the global credit crisis to the same extent as their trans-Tasman and international cousins, New Zealand property stocks have had to face the same set of issues - tighter and more expensive credit, investor mistrust, and the economic downturn. They have responded with the same strategies: new capital raisings, ongoing asset write downs, asset sales (generally of an 'odds and sods' nature, rather than wholesale distressed selling), and cuts to dividend payments to conserve cash. These developments are not helpful for share prices in the short term. In the longer term, though, they're necessary to put the sector on a permanently secure financial footing. These responses have resulted in rising property share prices in overseas markets. Thus far, however, local investors do not yet appear to have regained enough confidence to buy the New Zealand versions.
Australian & International Property - Outlook
The Australian listed property sector - what remains of it - is characterised at present by three trends. These are the high level of new capital raisings (such as Mirvac's A$1.10 billion earlier this month); ongoing asset write downs; and suspensions or reductions in dividend payments to conserve cash. These developments are unhelpful for property share prices in the short term. Over the longer term, however, they're necessary to put the survivors on a permanently secure financial footing. Indeed, some commentators have noted that successfully-recapitalised REITs may already be in a secure enough position to buy up weaker rivals (or at least pick up good assets from them). In sum, the Australian listed property sector appears to have passed through the eye of the storm.
It's the same story in global property markets: those left standing are recapitalising (over US$11.0 billion has been raised in the US REIT sector alone), taking valuation hits as they mark down the values of their properties (British Land recently announced a 41.0 percent reduction in the value of its portfolio), and conserving cash. As with the local REITs, the recent rise in prices is consistent with investors believing that the very worst for the sector is past.
New Zealand Cash & Fixed Interest - Outlook
The fall in the 90-day bill rate follows the cumulative one percent cut in the official cash rate, but looking ahead, it's not obvious why the futures market is signalling an about turn in short-term interest rates in coming months. (The futures pricing expects bills to be a full one percent higher in a year's time.) The most important influence on the bills market is monetary policy, and the Reserve Bank's last pronouncement on 11 June didn't sound like a move towards a tighter monetary policy was forthcoming.
Higher long-term interest rates are easier to understand. Government bond yields globally had fallen to unsustainably low levels as investors bought the safe haven asset of choice. As these fears have receded, the asset is no longer in such hot demand, and there are also worries about the scale of future issuance of government debt. On the currency front, the $NZ has benefitted from reduced investor anxiety. The outlook for the $NZ remains uncertain, as it will depend on investors' comfort levels, rising if they remain focused on global recovery, but otherwise relapsing.
International Fixed Interest - Outlook
Although the economic outlook is brightening, there's little imminent prospect of any major central bank raising short-term interest rates until it's absolutely clear that the worst is well past both in terms of the credit crisis and the global economic cycle. Short-term interest rates will therefore remain low. As last month's update noted, it was always likely that government bond yields would increase as investor worries receded and the weight of new supply from government fiscal deficits hit the market, and that process may yet have further to run. Investors appear minded to take advantage of the still-high credit spreads being paid by even the more creditworthy borrowers, and corporate bond yields may continue to reduce gradually.
Performance periods refer to the month and three months to 24 June 2009.
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