New Zealand short-term interest rates have changed little in recent months, 90-day bank bills yielding 8.75 percent. This reflected the Reserve Bank's decisions in December and on 24 January to leave the cash rate unchanged at 8.25 percent. Latest figures show annual inflation at 3.20 percent, the result of higher government spending and rising food and energy prices. This is above the Bank's target and forecasters' expectations, suggesting another increase may be in the pipeline, although fragilities in world investment markets may lead the Bank to a 'wait and see' stance for the meantime. Any rate rise would increase further the already-attractive yield premium cash offers over bonds.
Ten-year New Zealand government bonds are yielding around 6.30 percent. As in other markets, government bonds have been the safe haven asset of choice at a time when sharemarkets have been weak and the credit risks with corporate bonds have been increasing. If the US can get through a period of slower growth without outright recession, further effects of the debt crisis are constrained, and central banks can restore confidence, shares should rally and bonds sell off. If the opposite occurs, shares are likely to weaken and bonds become more favoured by gun-shy investors, so their prices would rise and yields fall to even lower levels.
The listed property sector has been hit hard over the past three months, the NZX Property Trusts Index losing 10.25 percent. Although the introduction of the new tax regime and a previous market rally had supported the sector, listed property was torpedoed by the arrival of the global sharemarket rout in January. It's not clear why the trusts have not had more support. Most are currently trading at discounts to net assets (around 30.0 percent in the case of AMP Office, for instance), and unlike their Australian counterparts, Kiwi property trusts have also not been so highly-geared or expanded to the same extent overseas. It's likely, though, that the higher yield and lower risk offered by cash is more attractive to investors, while the high-profile collapses of a string of finance companies (some property-related) may be making investors think twice about investing in property stocks. Although valuations are therefore reasonable, continuing uncertainties about the direction of global markets also suggest that it's not yet time to embrace listed property wholeheartedly.
The New Zealand sharemarket has had a tough time, down 12.90 percent over the past three months, the pain distributed widely from the largest to the smallest listed companies. Some of this was a side-effect of shockwaves emanating from the US in January, which has gone some way to restoring share valuations from being on the expensive side back to closer to fair value. The outlook for the New Zealand market remains mixed. The very high dairy payout and higher government spending as we enter an election year should moderate the extent of a slowdown in the economy. But a weaker sharemarket is consistent with other signs of slower growth and more difficult conditions for corporate profits. High interest rates and the continuing high exchange rate are challenging for exporters, while household spending will also be affected by higher mortgage payments, petrol prices, and heating costs, meaning less discretionary spending in the shops. There's also the possibility of further volatility resulting from more bad news globally. All of this suggests that the outlook for the New Zealand sharemarket will remain challenging.
World sharemarkets were covered with red ink over the past quarter. The MSCI World Index lost 13.40 percent, and no region or sector escaped unscathed. The S&P500 Index in the US lost 11.60 percent for the quarter. European markets fell some 15.0 percent on average, and Japanese shares fared worse again. The emerging markets were not spared either, despite their still-impressive rates of growth. Even the previously red-hot Chinese market suffered a large fall. This volatility was prompted by fears that the US is either on the cusp of a recession, or already in one, although the indicators on this front are mixed. Private sector employment has contracted, growth numbers have disappointed, and there is continuing carnage in the sub-prime mortgage lending segment. But there are also signs of resilience in consumer spending, and US exports have been in better shape, thanks to growth in the rest of the world and a competitiveness boost from the lower $US. In short, the outlook for the US remains hard to read. The likely path for sharemarkets worldwide will also be influenced by the success or otherwise of central banks' attempts to restore confidence, and by whether or not more bad news emerges about financial losses associated with sub-prime and related investments. The fact that recent turbulence knocked the emerging markets for six as well raises doubts about the validity of the 'decoupling' thesis. (This is the idea that even if the US slows down, the strongly-growing emerging markets would take up the role of the engine of world growth.) Again, caution is the watchword here, as further unpleasant surprises and more rollercoaster rides for world sharemarkets can't yet be ruled out.