Outlook for Investment Markets
World sharemarkets have welcomed news that the US Treasury is taking further major steps to curb the credit crisis, by buying Treasury bonds and dealing with toxic assets. While it is possible that the worst of the crisis is now behind us, growth assets continue to face further challenges from a global downturn which has intensified in recent months.
Australasian Equities - Outlook
The latest (March) New Zealand Institute of Economic Research consensus economic forecast is picking that GDP will have declined by 0.90 percent in the current year to 31 March 2009, and will shrink further again (-0.60 percent) in the year to March 2010. The immediate outlook for the Australian economy is also for a cyclical slowdown. Official figures showed that GDP growth contracted by 0.50 percent in the December quarter, and there are widespread expectations that the economy may well have contracted further in the current March quarter. Business forward orders are down to levels not seen since 1991 (according to the February NAB business opinion survey). Both countries are in a clear slowdown, and one that may last for a good part of this year.
The better news is that New Zealand and Australia continue to be less affected by the global slowdown than many other developed economies. Employment, for example, is holding up much better than in the US or the UK, and the decline in local GDP looks to be considerably less than appears likely for Japan or the Eurozone. Local shares therefore continue to look well-placed compared to those of economies with steeper downturns in prospect.
Australian & International Property - Outlook
The outlook for the domestic listed property sector is still highly problematic. Very poor results are still being posted, the latest being the effectively terminal Rubicon Europe and Rubicon America asset writedowns. Financing issues still remain acute, and distributions are being cut back as companies conserve cash in a world of scarce and expensive credit. A combination of shattered investor confidence and the pipeline of poor results still to emerge will generate headwinds for some time yet.
The strong bounce in overseas property shares in recent weeks shows that the sector is especially leveraged to any potential resolution of the global credit crisis. The key issue remains the cost and availability of refinancing for maturing debt. A secondary concern is the availability of credit for purchasers of any assets they choose (or are forced) to divest. If the US Treasury bond purchase and toxic asset plans really do mark the turning point in the credit crisis, then the low point for global property may now have been passed.
New Zealand Cash & Fixed Interest - Outlook
The Reserve Bank's statement on 12 March said that the Bank expected the current economic downturn to trough around mid-year, with a gradual pick-up thereafter. The Bank also noted that significant uncertainties remain around the timing and extent of global economic recovery and the global financial crisis, and that it might need to cut rates again, although "[a]ny future cuts will be much smaller than observed recently". The financial futures market thinks so, too, expecting 90-day bank bills to be 0.25 percent lower by September. The rise in longer-term rates is a signal that countries like New Zealand, with balance of payments and banking systems requiring external financing, will have to expect to pay more in a capital-constrained global financial system. The rise in government bond yields may reflect some easing in investors' worst fears about the global credit crisis, and also some concerns about the volume of future government borrowing requirements. The outlook for the $NZ continues to remain uncertain when sudden shifts in sentiment can produce very large moves in exchange rates. For now, the $NZ is the beneficiary of investor concern over the US government's plans to boost the supply of US dollars, which is driving down the value of the $US.
Australian Cash & Fixed Interest - Outlook
The minutes of the Reserve Bank's board meeting on 3 March showed that members were torn between cutting rates again, given evidence of a sharply weaker global economy, or waiting to see whether previous interest rate easings and other moves to stimulate the economy had been enough to stabilise the ship. The likelihood is that another, modest cut may yet be needed. The financial futures market agrees, expecting 90-day bank bills to be 0.20 percent lower by September. As is the case with the $NZ, the $A is for now the beneficiary of investor concern over the US government's plans.
International Fixed Interest - Outlook
Short-term interest rates look set to remain very low, as central banks continue to use monetary policy to attempt to mitigate the extent of the global slowdown. Government bond yields may also stay low as the US Treasury continues to purchase US bonds and as investors remain nervous. The low point is likely to be getting very close, either because the safe haven demand from nervous investors will abate as the credit crisis eventually eases, or because the gigantic volume of new bond issuance by governments worldwide will need higher yields to find buyers. Corporate yields are also dependent on the evolution of the credit crisis. If the latest US initiatives mean that the crisis has finally turned the corner, corporate risk spreads will start to decline.
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