Outlook for Investment Markets
Deteriorating economic conditions and the unwinding of debt continue to cast a long shadow over the outlook for local and international shares and property. On the income side, there's the prospect of lower yields from cash as a result of further cuts to interest rates, while holding government bonds is likely to remain a useful insurance policy while uncertainties over the financial and economic outlooks remain high.
Australasian Equities - Outlook
The outlook for the New Zealand economy and sharemarket are not great. The latest OECD report - noting that the country had already been in recession in 2008 - predicted that this would continue throughout 2009, before only a hesitant recovery in 2010. Exporters and companies serving the domestic market alike will struggle with shrinking demand and an uncertain business environment, and the effects on investment and employment are already visible. Australian economic indicators and corporate profit results will also be disappointing in coming months. Indicators including the Westpac-Melbourne Institute economic index and the National Australia Bank business opinion poll show the poor state of business conditions and confidence, and give little reason for optimism. Local shares now have improved valuations, however, and comparatively attractive levels of dividend income. At some point, the fact that the indicators will be looking 'less bad' could be enough to spur increased buying interest.
International Equities - Outlook
There's still a high degree of uncertainty about the international financial and economic outlook. A key issue is the scale of the knock-on effects of the credit crisis and deleveraging, which have been much greater than expected. The credit crisis does however appear to have stabilised, and the pace of cyclical worsening may be slowing down. This does not mean that recovery is actually underway, or likely to be soon, but that the economic indicators appear to be deteriorating at a slower rate. An example is the likely evolution of the US economy, which if current forecasts are right will have contracted by five percent at an annual rate in the March quarter, but only 1.80 percent in the June quarter. "The worst is past" theme could well start to support international sharemarkets as a result, and at some point - it could still be some way down the track - international shares will begin to anticipate the eventual economic upturn. And while sharemarkets have until now more or less moved together, markets could from here be more discriminating, and countries and regions with better prospects (Asia especially) could outperform.
New Zealand Property - Outlook
Kiwi property shares have proved more defensive in character than other listed property or broader sharemarkets, but this is being challenged. Local property shares are beginning to face some of the same issues as overseas property markets, even if to a lesser degree. A number of leading names have been raising new equity and selling down properties to reduce debt, and the weak state of the economy will lead to continuing pressure on rent rolls.
Australian & International Property - Outlook
The outlook for Australian listed property remains clouded. Financing issues are still problematic, distributions have already been cut (in some cases severely), and any gradual recovery in prices is overshadowed by the emerging signs of a serious economic slowdown. The outlook for global property shares is similarly gloomy. General Growth Properties' collapse into the arms of its creditors is a further warning sign that the process of deleveraging - unwinding the massive amount of debt previously acquired - still has a long way to run, and that there will be casualties along the way.
New Zealand Cash & Fixed Interest - Outlook
The Reserve Bank of New Zealand noted in its latest statement on monetary policy that the world economy was slowing faster than anticipated, and that although extensive policy stimulus had been applied both at home and overseas, "there was scope for a further modest adjustment to the cash rate". The gist of its statement is that we can expect a bit, but not a lot, more easing - probably one more 0.25 percent interest rate cut - and therefore lower yields from cash. While the Kiwi dollar is arguably close to where it 'ought' to be on a purchasing parity basis, the outlook remains hostage to fickle changes in global sentiment about the credit crisis and the economic slowdown.
Australian Cash & Fixed Interest - Outlook
It's likely that the Australian cash rate will be cut again, too. Futures market prices suggest that bank bills will bottom out around 2.75 percent in September. Commonwealth bonds remain an attractive insurance policy should improving trends in the global credit crisis prove premature. The history of the credit crisis shows that it can continue to spring unpleasant surprises. Like the Kiwi dollar, the outlook for the $A remains hostage to global sentiment about the economic slowdown and the continuing evolution of the credit crisis.
International Fixed Interest - Outlook
Government bond yields remain low. There is also the risk of greatly increased supply (and lower prices), as governments face the prospect of substantial deficits, and the need to issue debt to finance them. Even so, holding government bonds remains a useful insurance policy while uncertainties over the financial and economic outlooks remain high. Investment-grade corporate bonds are also attractive, but the third sub-sector, low-quality or 'junk' corporate debt, is not.
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