Australasian Equities - Outlook
A slowdown is clearly underway in the New Zealand economy which will feed through into lower company profits and share prices. Higher interest rates and the continuing high $NZ are hurting exporters, while weaker retail sales, lower business confidence, the reduced availability of credit, and the rapidly-weakening housing sector are also ominous signs. On the other side of the ledger are soaring world food prices, from which New Zealand is a prime beneficiary, while tax cuts and higher government spending are highly likely in the forthcoming election year budget, which will inject some spending power into the economy. Despite this, economic conditions will remain difficult for New Zealand companies, as the growth slowdown is compounded by increased costs such as rising wages and salaries from the still-strong labour market and sharply-higher input costs for energy and for many industrial commodities.
Evidence of slowdown is also widespread in the Australian economy. Retail sales numbers show little or no growth; consumer confidence is well down; business conditions have softened further; and jobs growth has slowed. The areas most exposed to interest rates have been weaker, and housing finance approvals have fallen much more sharply than expected. Even with this slowdown, though, the outlook for the Australian economy and sharemarket remain better than for most other places. And although the Chinese authorities may have to engineer their own slowdown, affecting the resources stocks, very large price increases appear to be in the pipeline for iron ore and coking coal which will be supportive.
International Equities - Outlook
Recent indicators have revealed greater downside risk from international equities than upside potential. It is now more clear that the outlook for the United States is at minimum a substantial slowdown, and at worst going beyond this into recession. Seventy-six percent of economists in the Wall Street Journal's latest poll believed that the US economy is already in recession. They are picking slow or no growth in the first half of this year, and a slight pick-up in the second half of the year. This may be optimistic - the International Monetary Fund is more bearish still, predicting a deeper and longer recession. There is also reason for greater caution about the 'decoupling' theory, the idea that the developing economies would sail on untroubled by a US slowdown. While there's good reason to believe that infrastructure build-out will continue to underpin good growth in the emerging markets, more account needs to be taken of the links between them and their slowing trading partners in the developed world. Soaring energy and food prices also need to be factored into global growth
prospects. The ultimate evolution of the credit crisis also remains highly uncertain. A number of central banks have demonstrated their determination to unlock the more gridlocked financial markets, through either cutting interest rates or active market operations. However, the scale of actual losses continues to surprise on the downside, and requirements on banks to replenish their equity are substantially greater than thought previously. All this adds up to increased risks for international sharemarkets in the coming months.
New Zealand Property - Outlook
An environment of rising interest rates is rarely congenial for property assets. It's also likely that investors are remaining cautious because of the implosions of some leading Australian property trusts, while the prolonged series of finance company collapses is also unlikely to be helping. This weakness looks overdone, though. Recent operational results from AMP Office, Kiwi Income Property, and Property For Industry have been uniformly good, with none of the unpleasant surprises revealed across the ditch. The sector is currently trading at a discount of around 18.0 percent to net assets, and leading names' income yields are in the nine to 11.0 percent range. Notwithstanding the slowing economic conditions, these characteristics suggest that the listed property sector appears well-placed to ride out the cyclical downturn.
Australian Property - Outlook
The sources of the listed property sector's malaise are not hard to identify. Trusts with high debt levels have come under intense scrutiny because of the higher costs of refinancing debt and the depressed market for any fire sale of assets. The outlook is also not promising for the retail-focused trusts exposed to the risks of slower consumer spending in the developed economies. The sector is likely to continue to languish until there is greater clarity around the financial state of each trust.
New Zealand Cash & Fixed Interest - Outlook
The key reason for the stability in short-term interest rates has been the unchanged monetary policy stance. Latest Consumer Price Index figures, for the March quarter, showed a headline inflation rate of 3.40 percent. Further interest rate rises appear unlikely, given the already fragile state of the economy, but the need for vigilance on the inflation front also means that cuts to interest rates any time soon are also unlikely. Corporate bond yields have now risen to the point where they offer a higher yield than cash, and a respectably-rated and diversified portfolio can be assembled with a yield in the nine to 10.0 percent area. While credit markets may not have reached the end of their worries over debts and defaults, a good deal of the potential risks have now been incorporated into much wider credit spreads.
The $NZ gained ground against the $US over the quarter, with a 3.30 percent rise to 78.5 US cents at the time of writing. This probably owed as much to global weakness in the $US, though, and falls against other currencies meant that the $NZ fell one percent in overall trade-weighted value for the quarter. The most likely near-term outlook for the $NZ is for more of the same. Further out, though, the biggest factor supporting the $NZ - its interest rate relativities against the $US - will wane as both countries' central banks begin to reverse directions in monetary policy. At that point, the $NZ will be vulnerable to weakness.
Australian Cash & Fixed Interest - Outlook
The Reserve Bank of Australia has now increased interest rates by one percent in four steps, so the issue is whether the Bank feels it has done enough to bring inflation back into the two to three percent target band. Although headline annual inflation at the end of the first quarter of this year was 4.20 percent, higher than either the Bank or forecasters had anticipated, the Bank appears to be waiting to see whether the medicine will do its work. The financial futures market currently sees no further increase and a chance of the first rate cut by the end of this year. Bond yields have on average risen well clear of the cash rate, in the wake of increased investor nervousness about borrower quality. Both the running yields on offer and the potential for capital gains down the track make domestic bonds more attractive than they have been for some time.
The $A got as high as 94.75 US cents on 28 February, and although it has edged back since, the $A is still well up against the $US for the quarter, with a 5.40 percent increase. This translated into a more modest 3.80 percent increase in overall trade-weighted value for the period. The outlook for the $A remains positive on economic fundamentals, with several supportive factors (notably world commodity prices and Australia's terms of trade) still running hot, although further credit crisis-related bad news is likely to lead to sudden sharp selloffs.
International Fixed Interest - Outlook
Global government bonds remain relatively unattractive because of their low yields in the 'flight to safety' environment. The higher yields from corporate bonds are more attractive. It's possible that credit crisis anxieties may worsen again, leading to a greater widening of corporate credit spreads and temporary loss of capital value. Even so, the running yield on overseas corporate debt has risen enough to compensate for these risks.
Performance periods refer to the month and three months to 23 April 2008.
Read the full article (.pdf)