Outlook for Investment Markets
Many sharemarkets bottomed out at least temporarily in the second half of November. This could be a sign that the worst of investor nervousness about the global credit crisis is behind us. There has also been further stimulus, notably the US Federal Reserve's historic cut to near-zero interest rates. Despite all this, the immediate economic outlook continues to deteriorate. Markets are likely to remain volatile and nervous until there's greater certainty about the scale and length of the developed economies' downturns, and signs of ultimate resolution to the banking and credit crisis.
Australasian Equities - Outlook
The size, scale, and duration of the economic slowdown for both the New Zealand and Australian economies now look more worrying than before. In New Zealand, latest consensus forecasts collated by the NZIER expect growth to fall over the year to March 2009. Growth for the year to March 2010 is expected to be much slower than previously thought (+0.90 percent instead of the +2.10 percent expected in the September survey of forecasters).
In Australia, forward-looking indicators such as the forward orders component of the National Australia Bank Business Survey have weakened further. Some business activity measures are now at levels last seen in the 1991 recession. Latest economic data has also been weak, notably the loss of 15,600 jobs in November. News out of China signalling a greater downturn than expected also has worrying implications for the resources sector, and base metals prices dropped sharply in both October and November. There are some countervailing positives in both countries. Monetary policy has been eased substantially, and more interest rate cuts are probably in the pipeline. There has also been a succession of fiscal policy stimulations, and falls in petrol prices are helping household budgets.
Investors will at some point start looking at improved valuations and the prospect of upside on the other side of the current slowdown, but for now, confidence in both the New Zealand and Australian sharemarkets remains fragile.
International Equities - Outlook
World sharemarkets continue to suffer from worse-than-expected economic news. One particularly dampening statistic was the loss of 533,000 jobs in the US in November. Forecasters are now expecting the US economy to have shrunk at an annual rate of 4.30 percent in the current quarter, and expect the recession to continue through the first half of 2009. News out of the UK, the Eurozone, Japan, and the major emerging markets has also been disappointing, especially in China, where various indicators such as imports and electricity generation have been showing a faster slowdown than anticipated. Offsetting this have been the very aggressive monetary policy easings, and there is at least the possibility that the credit crisis is finally being contained. Even so, world sharemarkets remain fixated on the ongoing downside risks.
New Zealand Property - Outlook
Little has changed here - the companies are trading at very large discounts to net assets, which would seem adequate insurance against any downward revaluations to their property assets, and the yields on offer remain comfortably in double-digit territory on a pre-tax grossed-up basis. The relative value of the generous income stream has improved, given lower interest rates and government bond yields. But the one thing that has changed is that the economic outlook has darkened, expectations for business activity now softer than seemed likely even as recently as a month ago. New Zealand property trusts' high yields and distressed valuations will eventually attract interest, but investor confidence will need to recover first.
Australian & International Property - Outlook
A smidgin of good news has emerged from the domestic listed property sector: Centro, the company whose refinancing difficulties were a catalyst for the sharp selloff over the past year, has arranged a refinancing deal with its bank creditors. But it remains doubtful whether the settlement will go far enough to lift the pall of investor gloom about the sector. A large number of leveraged property companies still face similar refinancing issues. In the meantime, the outlook has deteriorated and now looks more like a 'hard landing' than the soft landing that seemed more likely as recently as a month ago. High yields and distressed valuations will eventually attract interest, but investor confidence will first need to be in better shape than it is right now.
For global property, the sharp downward shift in economic growth expectations for the developed economies will continue to weigh on the sector. European statistical agency Eurostat, for example, reports that European-wide employment fell in the September quarter for the first time since the agency started collecting data in 1995. This labour market weakness will affect both the office and retail sectors, while industrial property will struggle with cutbacks in industrial production: the Purchasing Managers index of Eurozone manufacturing output dropped to a record low in December. There's also the issue that the credit crisis continues to overhang the more indebted companies, with doubts over the costs and availability of refinancing, the diluting effects of new capital raisings, and the possibility of forced asset sales into a very weak market.
New Zealand Cash & Fixed Interest - Outlook
The Reserve Bank of New Zealand has, like most other central banks, changed gears in favour of supporting demand in the economy over putting the battle against inflation at the forefront. When announcing its most recent interest rate cut, the Bank stated that it "is appropriate to deliver this reduction quickly to support the economy and keep inflation from falling below the target band". (Yes, below.) Further interest rate cuts are on the horizon, markets expecting the cash rate to be 0.75 percent lower by June next year, which would take the Kiwi 90-day bank bill rate to around 4.50 percent.
Australian Cash & Fixed Interest - Outlook
In the minutes of its December meeting, the Reserve Bank of Australia stated that it saw the need to move from a neutral to an expansionary position. Although the Bank is now apparently in 'wait and see' mode, markets expect further rate cuts to come. Some commentators are picking another 1.50 percent of cuts by June 2009, which would take 90-day bank bills to just below three percent. Longer-term rates are also likely to remain low, as inflationary risks evaporate because of the economic slowdown and sharply lower oil prices. Investor demand is however likely to remain focused on the safety of government bonds, and less keen to buy corporate risk. Like the $NZ, the outlook for the $A will depend on the continuing evolution of the credit crisis.
International Fixed Interest - Outlook
Short-term money market rates will remain very low everywhere, as central banks battle the credit crisis using very easy monetary policy and strong expansion of liquidity. Government bond yields are likely to remain low, too. Inflationary risks everywhere have vanished, thanks to the combined effects of impending or actual recessions and the plummeting oil price, which had dropped to under $US45/barrel at the time of writing. In the US, for example, consumer prices fell 1.70 percent in November alone, reflecting sharply lower energy costs, while 'core' inflation showed that prices were stable in the month. Although some fund managers believe that corporate credit spreads at their current high levels make attractive buying valuations for corporate bonds, it's hard to see world bond markets performing well until credit crisis uncertainties come closer to a final resolution.
Performance periods refer to the month and three months to 17 December 2008.
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