Australasian Equities - Outlook
The stronger performance of Australian shares can be explained by the sharply-contrasting cyclical outlooks. In New Zealand, the news has been on the weak side of expectations, particularly for employment: 29,000 jobs were lost during the March quarter, most of them full-time, and the unemployment rate rose (though is still low by international standards). Household budgets are being squeezed by higher mortgage payments and petrol bills, retail sales have been weak, and consumer sentiment has been affected by the downturn in the housing market. Business opinion surveys have also turned sharply pessimistic. The opposite has been the case in Australia, where the news has mostly been better than expected - 25,000 new jobs in April, a 13.80 percent year-on-year increase in house prices in the March quarter, and sharp rises in basic commodity prices. While a modest slowdown is on the cards for the Australian economy, New Zealand's slowdown looks to be greater again, and to have more effect on corporate profits. New Zealand is starting from a tougher position, with tighter monetary policy and stronger inflationary pressures on companies' input costs.
In these circumstances, Australian shares should continue to outperform their Kiwi counterparts.
International Equities - Outlook
The rise in world share prices has reflected a range of factors. The worst of the downside risk from the credit crisis has been taken out of play by the Bear Stearns rescue, aggressively looser monetary policy, and concerted central bank action to provide liquidity to logjammed markets. The US economic outlook, while weak, is not turning out as badly as feared. The Fed's rapid cuts to interest rates are helping moderate the impact of the housing slump and the credit markets' issues. Expectations are firming on a relatively short, shallow setback to US economic activity. In addition, growth in the developing world is still robust, with China for example expected to grow by over nine percent both this year and next. And finally, some markets' depressed valuations had brought out some bargain-hunting buying. Less positively, though, there are two significant risks. Oil is close to US$130/barrel, and the credit crisis, while being addressed by both policymakers (with liquidity) and financial institutions themselves (with new capital), keeps throwing up new problems. While the better-than-expected economic fundamentals are helpful for international shares, there's still scope for considerable volatility in coming months.
New Zealand Property - Outlook
Operating results from the major property trusts continue to look good. For the year to March, Kiwi Income Property reported revaluation gains, rental increases, a 7.90 percent payout increase, and said that "solid tenant demand for premium-quality office and retail space in the main metropolitan
centres resulted in high occupancy levels and rental growth". Valuations also remain attractive. In these circumstances, it's not clear why the sector has not attracted greater investor support. A combination of the looming slowdown in growth, uncertainties about property in the light of the Australian property stocks' problems, and the alternative of attractively-priced bond and note issues in the fixed interest market may continue to keep the listed property sector out of the limelight.
Australian Property - Outlook
The key factor which has overshadowed listed property, and which will continue to do so, is uncertainty about whether there are other Centro-style bombs still to go off. The availability of credit to the more leveraged trusts, and the financing costs where this is available, are other major uncertainties. For some trusts, the scale of their exposures to the weak US economy and to US retail property in particular are issues of concern. As previous monthly updates have noted, there are now some large discounts to net assets in the sector, and one might expect some bargain-hunting which would support prices. For now, though, investors remain too wary of further unpleasant financing or write-down surprises to have a dabble. Until there's clear resolution to the state of credit markets, the listed property sector is unlikely to show much improvement.
New Zealand Cash & Fixed Interest - Outlook
The drop in short-term interest rates has reflected an even stronger view than before that the Reserve Bank will cut interest rates sooner rather than later, in the wake of weaker-than-expected economic indicators. There may be some doubt about the timing and scale, and the futures market may be overexuberant in its current anticipation of three 0.25 percent rate cuts by the end of the year, but the overall direction is clear. The trend in longer-term corporate yields should also continue downwards on the back of reduced investor anxiety, provided there are no more ugly surprises from the credit crisis.
Australian Cash & Fixed Interest - Outlook
The minutes of the Reserve Bank of Australia's meeting on 6 May reveal that board members spent considerable time discussing the case for a further increase in the cash rate, but chose in the end to leave rates unchanged. Even so, the discussion shows that at a minimum, short-term interest rates will be holding at current levels for some time to come, and that further rises are not off the agenda. The futures market is picking no change for the rest of this year, and no significant downward move much before the middle of 2009. While there is still safe haven demand for Commonwealth bonds, which may keep their yields around their current low levels for some time yet, the yields on offer are unattractive relative to underlying inflation, so it would not be surprising to see them rise as credit crisis fears eventually abate. It's hard to find any reason why the strength in the $A should not continue, with support in particular from commodity prices and interest rate differentials.
International Fixed Interest - Outlook
The US Federal Reserve cut interest rates again, as expected, by a further 0.25 percent on 30 April, but now looks likely to hold interest rates at their current levels for some time. The Fed appears to
believe that it has done enough to stave off recession, and to assist with handling the credit crisis, while taking rates lower still could lead to a new risk of inflation getting out of hand. Longer-term interest rates may see little change until there's greater visibility around a resolution of the credit crisis.
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