Outlook for Investment Markets
Economic and financial news has generally been on the better side of expectations, with shares and listed property the key beneficiaries. Reduced investor anxiety has also led to a major rally in corporate bond prices. As a result, 'safe haven' assets such as government bonds have been less in demand. The major investment question now is whether markets have overshot the outlook for better times ahead.
Australasian Equities - Outlook
Latest surveys and official data for both countries have been consistent with the recession moderating, or even with the outright resumption of economic growth in the near future. In New Zealand, manufacturing and services sector surveys compiled by BNZ Capital and Business New Zealand for July showed an improvement for manufacturing (though not quite into positive expansion territory), and a marginally positive reading for the services sector for the first time since March 2008. Consumer confidence surveys have also turned markedly for the better. It has been the same in Australia , the bottoming out of the Westpac/Melbourne Institute leading indicators survey strongly suggestive of a turning point for the better across the ditch. As with overseas equities, the New Zealand and Australian share markets may have got carried away too far too quickly on this taste of better times ahead, and there are residual question marks about domestic consumer spending and the global economy. In New Zealand 's case there is also the issue of the Kiwi dollar having risen to levels that are hurting exporter profitability. But the fundamental backdrop for local equities has certainly become more support ive.
International Equities - Outlook
The rally in world shares has reflected a steadily-improving economic outlook. In the key US economy, a majority of forecasters now believe that the recession either ended in the June quarter or will end this September quarter. The Wall Street Journal consensus forecast is for steady growth in the two to three percent range out to mid-2010 . In Japan, the world's second-largest economy grew (by 0.90 percent) in the June quarter, the first increase in 15 months, and there were also small GDP increases in both France and Germany. Growth in Asia has been well above expectations, and China could grow by close to 10.0 percent this year, a highly-impressive outcome given the generally weak state of its developed economy export markets.
The big question for global share markets is whether the recent rally has been overoptimistic, rising too far and too quickly even after justifiably factoring in the recent change for the better in the global economic and financial outlook. Risks remain around the state of consumer spending in the developed economies, and the potential (although much reduced from last year's panic) for further twists in the global financial crisis. It would not therefore be surprising if world sharemarkets go into 'wait and see' mode after the recent rally to await further confirmation of the improved outlook.
Property - Outlook
The headline results from the property trusts continue to look alarming - AMP Office, for example, has produced an NZ$193.0 million loss on lower valuations and other marked-to-market adjustments - and there will be a lag before improving economic conditions start to feed into
the operating results of the property companies. Colliers, for example, was reported as picking that the Auckland CBD office vacancy rate will peak at 15.0 percent in 2011, up from an estimated 8.40 percent at present. Property For Industry noted that in the current tough times its performance would be affected by the difficulty of finding new tenants for vacated industrial space. Rising longer-term interest rates will also feed adversely into the formulae for valuing properties, leading to further write downs.
All that said, the tide has turned for the sector, as asset sales and equity raisings have improved balance sheets, the recession is closer to its end, investor sentiment is less panicky, and the running yield remains attractive.
Australian & International Property - Outlook
The Australian property sector is not out of the woods yet. Dexus Property Group, for example, has just posted an A$1.46 billion loss for the 2008/09 year, due to an A$1.60 billion hit to property valuations. Asset sales and equity raisings have however improved balance sheets to the point where some of the trusts which survived the
credit crunch are now in a position to consider buying more assets.
The ongoing easing in the global credit crisis and cautiously improving economic outlook have also improved the prospects for the global property sector. There's still a long way to go - US REITs alone have US$152.0 billion of debt maturing between now and 2013 that will require refinancing in still problematic debt markets, and lower-quality more indebted names will struggle to survive - but overall the fundamentals for global property are gradually on the mend.
Cash & Fixed Interest - Outlook
The Reserve Bank of New Zealand left the Official Cash Rate (OCR) unchanged at its meeting on 30 July, commenting that despite signs of a levelling off in economic activity, the economy remains weak…We consider it appropriate to continue to provide substantial monetary policy stimulus. The OCR could still move modestly lower over the coming quarters. We continue to expect to keep the OCR at or below the current level through until the latter part of 2010". This seemed a clear cut and realistic view, and one might therefore expect short-term interest rates to be steady in coming months. Financial markets have a different opinion, though, expecting New Zealand 90-day bank bills to rise by 0.50 percent in the next six months. It may be that the markets have looked at Australia - where the central bank has said that it no longer needs to cut rates, and the markets believe it will raise rates in the not too distant future - and concluded that the same will happen here. The prospect of better economic conditions ahead and correspondingly lower investor anxieties are likely to lead to further rises in government bond yields and wholesale credit rates, although credit spreads (what corporates pay above the base wholesale rate) should continue to decline. The $NZ has been in demand as global investors have been prepared to take on more foreign risk and as the $US has lost some of its attractiveness. The $NZ could remain stronger as long as investors feel more comfortable with the state of the global economy.
International Fixed Interest - Outlook
"More of the same" is the most likely outlook for international fixed interest. Short-term interest rates should remain very low, as none of the developed countries' central banks is anywhere near the position of tightening the current support ive stance in monetary policy. Government bond yields should continue to rise: the current average yield of 2.80 percent looks too low when investor demand for safe haven assets is no longer so intense, and when new supply of bonds is likely to rise sharply because of expansionary fiscal policies. Gradually recovering investor confidence should lead to further tightening in corporate credit spreads - assuming that the global financial crisis doesn't spring any surprises.
Performance periods refer to the month and three months to 19 August 2009.
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