Australasian Equities - Outlook
New Zealand was one of the earlier economies to move into recession, with two declines in GDP already and at least a third for the September quarter probable. Forecasts for economic growth have been cut back sharply. Treasury, for example, is picking growth in the year to June 2009 of a scant 0.10 percent. There are a number of offsetting positives, though. Monetary policy has been eased very significantly, thanks to a combination of interest rate cuts and a sharp fall in the value of the $NZ. Whichever parties end up in power after the general election, there will be a large boost from the May Budget. There are also good valuations on offer and dividend yields that have become more attractive as cash rates have fallen.
The outlook for the Australian sharemarket is a trade off between improved valuations, and the weakening economic outlook and any further credit crisis-inspired damage. There has been a significant easing in monetary policy - with more likely - and also a timely A$10.0 billion fiscal package which will feed through quickly into household spending. Exporters' competitiveness has also improved very substantially thanks to the falling $A. There are clearly risks to corporate profits from an economy slowing faster than expected three months ago. Consensus forecasts that the economy would grow by two to three percent in 2009 have been revised significantly downwards. The idea that Australia could enjoy 'immunity' from a global slowdown because of ongoing strong growth in Asia has also lost some of its force. All this casts long shadows over the outlook for Australian shares.
International Equities - Outlook
The concerted stabilisation measures taken by many governments and central banks are good news for world sharemarkets, taking the worst of the credit meltdown scenarios out of the picture. Sharemarkets now have to contend with the second issue: that prospects for economic growth are unambiguously worse than they were three months ago. Forecasters are now picking very soggy economic activity for the US economy. There has also been extensive publicity around signs that the Chinese economy is beginning to grow less rapidly than before. Even though the worst of the credit crisis appears to have been contained, fiscal and monetary policies have been eased across a wide range of countries, oil prices have dropped very substantially, and share valuations have improved, world sharemarkets will continue to struggle against weakening economic indicators.
New Zealand Property - Outlook
Economic activity is clearly weak in New Zealand, not the best of macroeconomic backdrops for a sector that relies on the overall performance of the rest of the economy. Investors may also shun listed property in favour of government-guaranteed trading bank deposits. That said, the sector starts from a position of strength: occupancy levels are high, as is the quality of the leading portfolios, and weighted average lease terms are reasonably long. New Zealand property trusts have also stuck mostly to traditional 'buy and hold' investing rather than reliance on development profits, with lower leverage and none of the Australian trusts' riskier ventures overseas. The sector also has attractive valuation characteristics, with discounts to net assets of the order of 25.0 - 30.0 percent for the leading names, and generous grossed-up pre-tax dividend yields.
Australian & International Property - Outlook
The sheer scale of the fall in domestic listed property prices, down 52.50 percent over the past year, has already led to more realistic valuations. But there may be further unpleasant surprises to come. The proposed recapitalisation of GPT, accompanied by a dilution of existing shareholdings, is likely to see further falls in GPT's price. This suggests that although as a whole the valuations in the sector are more reasonable, individual stocks may still provide unpleasant results.
The outlook for international property is subdued. The deteriorating international economic climate threatens tenancy levels and rental streams. This is especially the case when some sectors - such as offices in the City of London - are still in the process of unwinding previous speculative excesses. However, global listed property trusts are generally more traditional 'collect the rent' structures, with less reliance on development profits or funds management engineering. This makes them attractive in an environment of more expensive debt-raising and greater risk awareness.
New Zealand Cash & Fixed Interest - Outlook
New Zealand inflation for the September quarter was as bad as anticipated: a 1.50 percent increase, contributing to a 5.10 percent annual increase. Food, housing and housing utilities, and energy prices were the main culprits. The Reserve Bank at its 23 October easing made it clear that other issues were front of mind - in particular, stabilising the financial system - but expects inflation to be back within the one to three percent band by mid-2009. Yields on government bonds are still not competitive with bank deposits, and there may be further rises in store (generating capital losses along the way) in coming months.
Australian Cash & Fixed Interest - Outlook
September quarter inflation at 1.20 percent was slightly worse than consensus forecasts of one percent, contributing to an increase of five percent on a year ago. The underlying rate of inflation was the same story. This would usually be cause for tightening monetary policy and pushing up interest rates, given the Reserve Bank's 'two to three percent across the cycle' mandate. These are not normal circumstances, however, and the Reserve Bank has made it clear that although the inflationary focus will not be neglected, the need to stabilise the financial system and react to slowing growth have carried the day. More interest rate cuts remain on the cards, taking the yields on cash lower. Although yields on government bonds have risen modestly, they are still not competitive with bank deposits. There may also be further rises in store (generating capital losses along the way) in coming months.
International Fixed Interest - Outlook
Yield curves globally are steepening, which means that the yields on longer-dated investments are becoming more attractive than cash. The principal reason is that central banks are cutting short-term interest rates aggressively in the battle to contain the credit crisis. Slower growth and hence much reduced inflationary pressures are also the kind of environment in which bonds can be expected to do better than before (although slower growth will also raise the rate of corporate defaults). Conditions in world bond markets are still far from normal, producing apparently attractive yield opportunities but also increased risks and shaky liquidity. Even so, the yields on global bonds are likely to remain more attractive than they have been for quite some time.
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