Australasian Equities - Outlook
The New Zealand economy is already well into a pronounced cyclical slowdown. Latest GDP data shows falling growth in the March and June quarters, and the September and current December quarters are also likely to have been weak. 'Recession' fits the bill, thanks to the combined effects of previously tight monetary policy, the various effects of the credit crisis, and weaker overseas markets (showing up most recently in reduced forecast payouts from Fonterra). Latest consensus forecasts now expect little or no GDP growth next year, although 2010 is looking better as fiscal and monetary easing kicks in. The Australian economy is also headed for a cyclical slowdown, although not to the same degree. Aussie growth in 2009 appears headed for a reasonable 1.70 percent, although that may be revised further downwards in coming weeks. Government moves to inject demand into the economy will in time reverse the downswing. Both local sharemarkets will at some point start to look towards the far side of the current slowdown, but in the interim investors continue to worry about the credit crisis, uncertainties over former high-flyers like Babcock & Brown, and the unwinding of the commodity price boom.
International Equities - Outlook
Consensus global growth forecasts have been cut back across the board. The Wall Street Journal's panel of 55 forecasters now expects the US economy to contract at a three percent annual rate in the December quarter, when only two months ago the panel was picking subdued growth of 0.60 percent. US unemployment at the end of next year is now expected to be 7.70 percent, a full 1.50 percent higher than expected two months ago. There have also been downwards revisions to forecasts for other important economies. Even the Chinese central bank has stated that "the risk of an economic downturn is getting bigger". There are some offsetting positives, among them strongly expansionary fiscal and monetary policies and probably more to come. (The UK government had at the time of writing just cut the VAT sales tax from 17.50 to 15.0 percent, for example.) Also helpful are a raft of interventions aimed at supporting the financial system, and a sharply lower world oil price (now down to under $US50/barrel, less than half its cost three months ago). But world sharemarkets remain focused on growth and earnings downgrades, and show few signs of recovery yet.
New Zealand Property - Outlook
Investors have not been tempted back into the domestic listed property sector, despite yields rising comfortably into double-digit territory. This remains surprising as despite the poor immediate cyclical outlook, the main names in the sector have quality income streams and are trading at substantial discounts to net assets. Additionally, New Zealand trusts have far fewer of the problems that have beset their Australian equivalents, with lower levels of leverage and little or no overseas exposures. It may take a recovery in investor confidence in the wider sharemarket before the sector improves.
Australian & International Property - Outlook
Australian investors have like their counterparts across the Tasman been wary of the listed property sector, even with prospective yields in double-digits,although there has been an encouraging glimmer of corporate activity (Stockland's purchase of a slice of GPT). The main reason for this reluctance has been the ongoing issue of difficulty in refinancing debt. The company that started the rout, Centro, has still not resolved its banking issues, and forced asset sales into a weak market will depress property
values even further.
Global property markets will continue to struggle during the current phase of downward revisions to global prospects for employment, industrial production, and retail sales. Global property also remains particularly at risk from collateral damage from the credit crisis, as the more indebted vehicles face ongoing uncertainty over the availability and cost of refinancing maturing debt.
New Zealand Cash & Fixed Interest - Outlook
Announcing its latest easing, the Reserve Bank stated that ongoing financial market turmoil and a deteriorating outlook for global growth had played a large role in shaping the decision. Although the Bank still has concerns about domestic inflationary pressures, the immediate weakness of economic activity is clearly the prime current concern, and the Bank said it expects to cut the cash rate further. The financial markets agree, and are anticipating 90-day bank bills to be one percent lower at 4.75 percent by next June. The outlook for longer-term interest rates remains hostage to the global credit crisis. There is no guarantee that further unpleasant surprises might not lurk down the track (at the time of writing the media was full of the US government rescue of Citigroup). Until these anxieties subside, the pattern of low government but high corporate yields will persist.
Australian Cash & Fixed Interest - Outlook
The Reserve Bank of Australia said in its 10 November statement that it would seek to strike the appropriate balance between avoiding an unduly sharp weakening in demand, and the need for inflation to return to the target band. Markets have been unanimous in judging that the weakness of demand is the immediate issue, and are expecting further substantial monetary policy easing. In the futures market, 90-day bank bills are expected to be as low as three percent by March.
International Fixed Interest - Outlook
A global slowdown of the kind now expected by forecasters would normally be associated with a strong performance from bonds, as inflationary pressures recede. But as noted in previous monthly Economic Updates, the macroeconomics of interest rates is not, for now, the driver of this asset class going forward. Rather, the ramifications of the credit crisis will remain front and centre. If confidence in the world's financial system improves, then government bonds will be less sought, and corporate bonds more in demand. Predicting the ultimate endgame of the credit crisis remains highly uncertain, however. If anxieties were to remain high or even worsen, there would be a continuation of current trends in which government bonds remain the safe haven asset, and corporate bonds - especially those of lower credit quality - are in deep disfavour.
Read the full report.
Performance periods refer to the month and three months to 24 November 2008.