Australasian Equities - Outlook
Both local economies face a cyclical slowdown, but the scale looks more severe in New Zealand,
in particular because of the weak housing market cycle. The Reserve Bank, for example, is expecting a peak-to-trough decline in house prices of 13.0 percent, and is picking economic growth to be less than one percent for the year to March 2009. Australia is not without its own cyclical issues: employment fell unexpectedly in May, for example, and financial stocks - a large bloc of the Australian sharemarket - continue to feel the impact of the credit crisis. On the other hand, Australia does not have a pronounced housing downturn, and enjoys more of the benefits of a booming resources sector. Both markets face short-term headwinds, but the Australian still looks the better of the two.
International Equities - Outlook
No sooner does one risk recede than another takes its place. The receding risk is the scale of a US recession. Most forecasters believe that the US economy will have a relatively short and mild setback. In its latest forecast, the International Monetary Fund said that the slowdown "has been less than feared, and recovery should begin next year", and some recent data supports this view. The growing risk is the many-headed impact of the huge rise in energy prices. This confronts oil- consuming economies with an unpleasant double bill of reduced incomes (to pay the OPEC bill) and higher inflation (from the direct and indirect effects of higher energy prices, on top of the existing pressures from buoyant food prices). In addition, the credit crisis continues to lurk - its latest manifestation was the credit ratings downgrades of the large US bond insurers. There are offsetting positive factors - continuing growth in the developing world, very cheap valuations in some markets - but for the time being, the downside risks to world sharemarkets look more influential.
New Zealand Property - Outlook
Some greater stability in prices going forward makes sense, as listed property shares were looking oversold. The Property Council's figures for performance from direct property for the year to March showed that returns on the ground were good. The total return across all sectors was 18.30 percent, made up of 10.30 percent capital gain and eight percent income. Operating results from the listed companies have also been satisfactory: AMP Office, for example, is showing an 8.10 percent valuation gain across the portfolio, 99.0 percent occupation, and a degree of 'under-renting' which bodes well for future rent reviews. Even allowing for the current cyclical slowdown's impact on rentals and tenancy, the sector is looking on the cheap side: it is still, for example, trading below the levels prevailing before the new Portfolio Investment Entity tax regime which enhanced significantly the value of the sector's income stream. These positive valuation aspects suggest good performance at some point down the track.
Australian Property - Outlook
Investors continue to shun property trusts for one simple reason: no-one can be sure which might be the next Centro. Debt has become more expensive when available, and often either unavailable or less available, forcing trusts to sell assets into a very one-sided market with few buyers. This in turn has caused investors to worry whether the valuations trusts are using for their properties actually reflect the likely price they might get if forced to sell. One estimate from UBS has the sector currently valued at $A73.50 billion, compared with stated net tangible assets of $A91.50 billion, suggesting that the market is seriously sceptical about valuations. Large discounts to net assets and increasingly generous dividend yields would normally be enough to entice buying interest and allow prices to recover. Until the last of the Centro-style issues is resolved, however, it's hard to see prices advancing in the Australian listed property sector.
New Zealand Cash & Fixed Interest - Outlook
The key driver for short-term interest rates has been the Reserve Bank's monetary policy stance. In its Monetary Policy Statement of 5 June, the Bank indicated that it would be likely to be able to lower the Official Cash Rate "later this year" if the economy continued to slow down, and consequently inflation pressures eased. The futures market is picking 90-day rates to drop to around eight percent by the end of the year. Government bond yields look low compared with current and potential inflation: in similar circumstances in most overseas markets, government yields have been rising, and it would not be surprising to see the same take place for New Zealand. Corporate debt yields are likely to remain high until the various credit crisis issues have been resolved.
Australian Cash & Fixed Interest - Outlook
Short-term interest rates are likely to remain at least at current levels for the rest of this year. The Reserve Bank indicated at its June meeting that rates would be steady, commenting that "on current policy settings, the necessary moderation in demand growth" which would see inflation come back down "was likely to occur". The futures market is still pricing in a good chance of one further tightening ahead, which is unsurprising given the strength of the current inflationary pressures in energy, resources in general, and food. Strong inflationary pressures are also bad news for bond yields, as are renewed worries over the ongoing mutation of the credit crisis.
International Fixed Interest - Outlook
These are unpropitious times for global bonds. Sovereign bonds were showing good returns as investors sought them out as safe haven assets through the credit crisis. More recently, other factors have become more important. One is the strong inflationary pressures from the sharply-higher oil price, which has virtually doubled (up 91.0 percent) in $US terms over the past year. Throw in strongly-rising food prices as well (corn in $US has risen almost 40.0 percent in the past quarter alone), and investors have been demanding higher yields to compensate for the potential loss of purchasing power. The widespread practice of currency hedging has helped to a degree, but the return over the six months to 31 May from the Portfolio Investment Entity global bond funds has been only 1.60 percent, less than cash in the bank. This appears unlikely to change any time soon.
Performance periods refer to the month and three months to 20 June 2008.
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