After several months of steady gains in global shares, a fall in the Chinese sharemarket in late February impacted share prices across the globe and contributed to some sudden currency moves as well as significant movements in interest rates. However, market jitters proved short-lived and global shares ended the March quarter up 1.7% overall in underlying currency terms.
The domestic sharemarket also took a dive in response to the global sell-off. As well as an increase in risk aversion, a disappointing company earnings season contributed to the poor performance for some domestic shares. A number of companies downgraded their future profit expectations. Despite this, earlier gains saw the NZSX50 index end the quarter up 1.7%.
Signs domestic growth was proving more robust than anticipated, together with ongoing strength in the housing market, contributed to the Reserve Bank of New Zealand becoming more nervous on the economic outlook. With inflation pressures remaining persistent, the Bank raised the Official Cash Rate (OCR) to 7.5% in March.
The rise in the cash rate contributed to 90-day bank bill rates rising over the quarter. The prospect of further rises in the OCR also pushed shorter term bond yields higher, while a fall in US bond yields put downward pressure on long term domestic interest rates.
The NZ dollar rose by around 1% over the quarter, although this overall figure masks much of the volatility experienced during the three-month period. There was a sharp dip following the equity market sell-off, but better-than-expected domestic economic data and higher domestic interest rates saw the NZ dollar bounce back to end the quarter on its highs.
Outlook
The coming year is likely to see global assets outperform domestic assets. International economic growth is expected to remain relatively robust and global inflation should remain low. US growth is forecast to slow slightly, but the economies of Japan and Europe still look to be improving.
Better than expected domestic economic data continues to reinforce the robustness of the New Zealand economy. Business confidence is well up on the lows of early 2006, the housing market remains resilient and unemployment remains at historically low levels. This resilience is still concerning the Reserve Bank and they retain a tightening bias. Despite this, the economic backdrop is still one of below trend growth, particularly for the domestic sector. The NZ dollar is expected to fall from its current high levels to correct the current imbalances.
We still prefer global equities to domestic equities, while we believe that shorter term bonds and cash, with their higher running yields, look more attractive than longer term government bonds.
Disclaimer
This article was originally published in the Autumn/Winter edition of Lookout magazine. Lookout is written, produced and distributed on behalf of TOWER's investment business. No part of this article may be reproduced without prior written permission from TOWER. The content is considered accurate at the time of printing; however, neither the magazine nor TOWER accepts liability for the results of any actions taken or not taken upon the basis of information contained within this article or for errors or omissions. www.tower.co.nz
Jennifer Innes
Institutional Client Relationship Manager
TOWER Investments
Issue 10: 31-05-2007