Australasian Equities - Outlook
New Zealand's growth fell in the March quarter, and June quarter GDP may also have contracted, while retail sales fell quite sharply in the June quarter. Unsurprisingly, the Kiwi sharemarket suffered while these setbacks materialised. That said, the recent rally is consistent with activity and corporate profits having reached their low points, and arguably beginning to turn for the better into 2009. Interest rates are coming down, the exchange rate is at more sensible levels, and there is a big fiscal boost coming under Labour (and potentially more again if a National-led government eventuates). The case for New Zealand shares has turned for the better.
On the Australian side, some of the domestic economic news has been dispiriting, notably weaker business confidence and (especially) retail sales, which fell more sharply in June than forecasters had expected. Households and firms have been wilting under the combined effects of slower growth in exports, the credit crunch, high interest rates, an uncompetitive $A, expensive housing affordability, and of course petrol bills. That said, Australia remains in better shape than some of the flirting-with-recession major economies. The labour market has held up well, resource prices even after recent weakness are still well up on a year ago, and both interest rates and the $A are becoming less adverse. The Australian sharemarket may therefore have done enough to discount the bad news.
International Equities - Outlook
The recent rise in world share prices was the result of several cross-currents. On the positive side, the sharp fall in the oil price appears to have trumped other, more negative developments. Oil dropped sharply from its peak US$145/barrel (West Texas grade) in early July to its current US$114. This reduced pressures on consumer budgets and corporate costs in the developed world, as did falls in world food prices and other commodities. (The Economist's index of world food commodities has dropped 11.70 percent in $US terms over the past month alone.) But there have also been more worrying developments. The credit crisis has continued to prey on investors' nerves, bad news emerging or rumoured at (among others) JP Morgan Chase, Lehman Brothers, insurer AIG, and the US mortgage firms Fannie Mae and Freddie Mac. News out of the developed markets has also been mostly on the disappointing side. GDP in the Eurozone, for example, fell by 0.20 percent in the June quarter, the first time there has been a continent-wide decline since the 1992 - 93 recession. Japan's economy also contracted (by 0.60 percent). Forecasters are also revising down likely growth in the developing world, although even on more pessimistic readings China and India will still be giving strong support to world trade. A "wait and see what happens" attitude to international shares remains a sensible approach to navigating these cross-currents.
New Zealand Property - Outlook
The stabilisation of listed property trust prices was overdue, as previous commentaries have suggested. Even allowing for the weak state of the domestic economy, New Zealand property stocks shared few of the characteristics which had devastated their Australian equivalents. Debt levels were more conservative, reliance on development profits lower, and exposure to more risky overseas ventures minimal. In addition, yields had risen to highly-competitive levels. (Kiwi Income Property Trust noted, for example, that its forecast nine cent tax-paid dividend would be equivalent to a 12.0 percent pre-tax return for a 33.0 percent tax-paying investor.) Operational performance has also been good - AMP Office reported a 12.40 percent increase in rentals from rent reviews and higher occupancy - and the ongoing yield from the sector remains attractive.
Australian Property - Outlook
It is possible that the listed property sector has, at long last, bottomed out. Traditional valuation yardsticks suggest that a great deal of the sector's problems are already factored into prices. There are wide discounts to net assets, and substantially higher yields of over eight percent across the whole sector. These are even higher for less favoured names: the yield on the Babcock & Brown Japan Trust (which reported during the past month) is over 15.0 percent. But it is still not obvious that the sector is now in the clear. Significant question marks remain about further write downs in net asset valuations, especially in overseas markets such as US offices and European retail properties, and current promised yields may not eventuate if today's dividends are cut as trusts become restricted to paying dividends out of cashflow. All this means, that the jury is still out for the listed property sector.
New Zealand Cash & Fixed Interest - Outlook
The Reserve Bank of New Zealand is on an easing course, given the pronounced slowdown in the economy, and is prepared to 'look through' the short-term rise in inflation from high petrol and hydro energy prices. Short-term interest rates should continue to fall, the futures market currently expecting 90-day bank bills to be over a percentage point lower by mid-2009. Longer-term rates should also continue to fall, but there remains the significant proviso that a further eruption of credit crunch jitters could jeopardise or even reverse the trend.
Australian Cash & Fixed Interest - Outlook
The Reserve Bank of Australia is, like its counterpart across the Tasman, on an easing course, and for similar reasons. Short-term interest rates will continue to fall, the futures market currently expecting 90-day bank bills to be 0.70 percent lower by mid-2009 (equivalent to three 0.25 percent interest rate cuts). Longer-term rates should also continue to fall.
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