Outlook for Investment Markets
Local and overseas share and property markets have once again fallen sharply as the likelihood of a recession in the United States and further damage from the debt crisis have preyed on confidence. The immediate likelihood is for further bad news on both fronts. Cash and the better-quality end of the bond markets continue to look like the assets of choice, but investors with a longer-term perspective should note that a number of sectors are now arguably oversold and cheap.
Both sharemarkets shared in the global drubbing
of the past month. The NZX50 Index fell 3.50 percent for the month, and 14.50 percent for the quarter. The Kiwi market has now been falling for
10 months, and is down 24.20 percent since its peak back in May 2007. The Australian market's decline is more recent (it peaked in November 2007), but almost identical in peak-to-today scale, with a decline of 25.50 percent (in $A terms). The Aussie market was down 9.30 percent in $NZ terms over the past month, dragged down especially by financials. Resources stocks were more resilient.
The local economic outlook has deteriorated. The Reserve Bank of New Zealand, for example, has
cut its GDP growth forecast for the year to next March to 1.90 percent (previously 2.60 percent), and Finance Minister Dr. Cullen has conceded that "it would be foolish to rule out the possibility that there could be two successive quarters of very small negative growth at some point in the next year or so". Key factors have been the intensifying downturn in the housing market, with its associated confidence and wealth side-effects; the drought; the impact of tighter credit; soaring fuel prices; and the still-high level of the $NZ crimping exporter profitability. Even allowing for fiscal stimulus in this year's Budget, and the strength of some commodity prices - notably dairy - this is likely to remain a difficult environment for the New Zealand market.
In Australia, the economic news has been on the positive side. For the second month in a row, for example, there was a much stronger-than-expected number of new jobs (36,700 in February, when forecasters had expected only 15,000), and Australia's likely GDP growth over this year of three to 3.50 percent is relatively healthy by developed economy standards. The shattered state of sharemarket confidence, however, has discounted relatively attractive fundamentals, significantly lower price/earnings ratios, and a 4.70 percent dividend yield, placing greater emphasis on the potential for further local collateral damage from the global debt problems and the various ramifications of the economic slowdown in the US. The fallout from the financial sector is therefore likely to remain the dominant factor until there is a catalyst for an improvement in confidence. The outlook remains brighter for resources stocks, as world commodity prices have taken off again across a wide variety of foods, some metals (notably gold), and energy.
Red ink's been splashed across all the world's sharemarkets. There was a 5.30 percent fall in the MSCI World Index in overseas currency terms over the past month, and a 14.20 percent decline over the past quarter (a 14.40 percent decline in $NZ terms). Falls were widespread: the S&P500 in the US was down five percent; the UK's FTSE down 6.50 percent; the CAC40 in France down 7.10 percent, and Germany's DAX down 7.70 percent. Japanese shares were especially weak, the Topix index down 13.90 percent. Emerging markets as a whole fell four percent, but there were very different regional patterns. Emerging Asian shares dropped sharply (-11.90 percent), Eastern European markets were down only slightly (-0.20 percent), while Latin American shares ended the month more or less unchanged, although with volatility along the way.
World sharemarkets have been fixated on two issues, and both delivered further bad news over the past month. The first is the weakening state of the US economy. There was a large 63,000 overall loss of jobs in February (101,000 gone in the private sector), February retail sales dropped by 0.60 percent (0.20 percent ex-cars), and 71.0 percent of forecasters in the Wall Street Journal's March poll now believe that the US is already in recession.
US GDP growth is now expected to be minimal (+0.10 percent) in the current quarter, and
only marginally better (+0.40 percent) in the June quarter, and those estimates may be on the high side. The second issue is the ongoing debt crisis, Bear Stearns' implosion and sale for a song to JP Morgan Chase only the most visible of the latest casualties. Investors fear further unpleasant revelations, and measures of risk aversion have risen to very high levels. In these jittery circumstances, offsetting positives are not getting much of a look in. Markets are not placing much weight on aggressive monetary policy easings by the Fed, the concerted credit-loosening intervention by several major central banks, or the still very strong growth expected in the major developing economies. Investors persisting with accumulation on a longer-term perspective are now being offered very cheap shares by historical standards in some markets, but may have to withstand further near-term volatility.
New Zealand Property
The NZX Property index fell by 3.70 percent over the past month, and by 10.20 percent over the past quarter. These declines were broadly in synch with the domestic sharemarket overall.
There are good reasons to expect the New Zealand listed property sector to start behaving better than the market as a whole. Valuations are at attractive levels on any metric you care to choose, and there are few obvious reasons why the sector has continued to slide. One possibility is that potential investors' funds are being hoovered up by alternative income offerings (notably the large subordinated debt issues from the ANZ and the BNZ, which are currently in the market offering 10.0 - 10.25 percent yields). Another is that the high-profile problems of the Australian listed property sector are still deterring Kiwi investors from considering the sector (at the time of writing, for example, the Rubicon group of trusts' prices were being marked down heavily). The fortunes of the sector will at some point turn: with relatively low leverage, no overseas adventures, and pre-tax yields in excess of 10.0 percent, there is value on offer, though it will take less gun-shy circumstances to reveal it.
The listed property sector had a horrible month, the S&P/ASX300 Property Trusts Accumulation Index down a substantial 16.90 percent, and down 26.80 percent for the quarter. The total return from the sector including dividend income for the past year is now showing a loss of 30.20 percent, the income offsetting only partially a very large 37.50 percent capital loss.
As noted last month, the key question for the listed property sector is whether these plunging values have fallen to a level where buying interest might re-emerge. The short answer seems to be no. Investors appear to be viewing the trusts in the same light as financial stocks, and with good reason in some cases. A combination of listed property trusts facing difficulties refinancing debt or meeting other obligations, combined with some crippled corporates being required to unload their listed property holdings (and so depressing prices) to meet their own financing demands, is still overshadowing the sector. At the time of writing, for example, the prices of the Japanese, American, and European trusts in the Rubicon stable were being savaged for exactly these reasons. Investors capable of sorting the wheat from the chaff may well find some bargains on current depressed valuations, but overall listed property remains a sector capable of springing further unpleasant
debt crisis surprises.
New Zealand Cash & Fixed Interest
It was a quiet month in the Kiwi money and bond markets, with little change in any of the benchmark rates. Ninety-day bank bills remained around 8.80 - 8.90 percent, 10-year Government bond yields around 6.40 percent, and the five-year swap rate was steady at a little over eight percent. The $NZ has been volatile, but has ended the month up some three percent against the $US at 81.5 cents. Weakness on some other cross-rates - notably against the $A and the yen - has however meant that the Kiwi has fallen slightly in overall trade-weighted value over the past month.
The Reserve Bank said in its 6 March Monetary Policy Statement that the cash rate "will need to remain at current levels for a significant time yet", and that there was a balanced mixture of upside risks (still strong inflationary pressures) and downside risks (a weakening economic outlook) to the future track of interest rates. Financial markets have since concluded that the downside risks are the ones to watch, and are picking that the Reserve Bank may have to ease as early as September. Corporate bond yields are however likely to remain high, as risk-averse investors demand higher credit spreads. The $NZ may be topping out - in overall value it has gone sideways for the past three months - but it may continue to hold up against the globally weak $US.
Australian Cash & Fixed Interest
Interest rates rose across the board over the past month. The yield on 90-day bank bills went up by 0.10 percent over the month and by 0.40 percent for the quarter to its current 7.86 percent, while
the yield on corporate bonds spiked up during the month, increasing by 1.20 percent to 9.50 percent. The only exception was Commonwealth bonds, where the 10-year yield fell 0.30 percent to a tad over six percent. The $A has been volatile, hitting a high of 94.75 US cents on 28 February, and is at the time of writing at 93.70 cents. Over the past month, the $A was up 3.70 percent against the weak $US, and up 1.60 percent in overall trade-weighted value.
The Reserve Bank of Australia raised interest rates as universally expected by 0.25 percent on 5 March, and the minutes of the policy meeting noted "the standard macroeconomic considerations as continuing to suggest the need for further tightening". However, the markets also noted the part of the minutes that said "the higher [current] setting of the cash rate would leave adequate flexibility to respond as necessary over the months ahead", and evidently judged that the ongoing fragility of the financial sector would in practice preclude further tightenings. The futures market is now picking that the Bank may need to cut rates as early as September. Commonwealth bond yields are likely to remain low, driven by risk aversion and the flight to quality assets. Corporate bond yields are likely to remain high until some end to the debt crisis comes into view. The $A is likely to remain volatile, but should continue to gain ground, given continuing weakness in the $US.
International Fixed Interest
Although the US Federal Reserve has continued to cut short-term interest rates, most recently by 75 basis points on 18 March, investors remain transfixed by the potential losses from the debt crisis. Safe haven assets like government bonds have as a result been in even greater demand,
with the average yield on global government bonds dropping even further to 3.10 percent (10-year US Treasury yields are now down to 3.40 percent, and Japanese government bonds down to only 1.25
percent). At the same time, credit spreads for non-prime borrowers have continued to widen, and corporate bond yields have risen further.
The outlook for global bond markets is for more of the same. The major central banks will continue to try to breathe liquidity into credit markets, but investors' near-term focus remains on the potential fallout from the debt crisis, looking for 'the next Bear Sterns'. Government bond yields are therefore likely to remain unattractively low, and corporate bond yields likely to continue to rise.
Performance periods refer to the month and three months to 18 March