Outlook for Investment Markets
The economic news both locally and globally has generally continued to improve (except for the unexpected news out of Dubai ), and forecasts for economic growth in 2010 are being upgraded in many countries, including here at home. While markets would normally welcome these developments, investors have not been big buyers of the better news, and appear to want to wait and see what happens next before making big commitments to the prospect of better times.
Australasian Equities - Outlook
The outlook for the New Zealand economy continues to brighten, various surveys showing signs of a turn for the better. The BNZ Capital/Business NZ survey of the service sector in November showed the strongest reading since early 2008, and it was noteworthy that the rise was based on stronger readings on firms' own activity and new orders rather than on more nebulous 'confidence' grounds. The National Bank's latest business opinion survey showed the same picture, firms' expectations for their own activity having risen again, and at their current level are consistent with the economy growing at a four percent rate. The Reserve Bank's latest forecasts are in the same ballpark, GDP expected to grow by 3.60 percent in the year to March 2011 and 3.90 percent the year after. The main factors appear to be the improving outlook in export markets in Asia and Australia , improved terms of trade (especially substantially higher dairy prices), and the feel-good factor for households of rising house prices.
Forecasters have been rather blindsided by the unexpected vigour of the Australian economy. For example, forecasters had expected only lacklustre employment growth in November of about 5,000 jobs, but there were 31,200 new jobs, all of them full-time, and the unemployment rate actually fell slightly (from 5.80 to 5.70 percent). The local share markets have been taking their cues from counterparts overseas, and it may be that the 'wait and see' mentality prevalent recently in overseas markets will continue to shape local prospects, but latest data and forecasts have been encouraging and the improving outlook for local corporate profitability is positive for both New Zealand and Australian shares.
International Equities - Outlook
The stability of world share markets has been impressive given that markets had to deal with what looked at first like another flare-up of the global financial crisis, worries over Dubai 's creditworthiness and the potential exposure of international banks to these problems. There has also been increased anxiety about the state of indebtedness of some heavily-indebted OECD countries, notably Greece , which at the time of writing was about to announce plans to rein in a fiscal deficit of 12.70 percent of GDP. Earlier this month the equally cash-strapped Irish government had delivered a swingeing budget to deal with similar issues, which involved four billion euro in expenditure savings including outright cuts to public sector pay rates and unemployment and other social payments. Offsetting these fears that sovereign debt might trigger another round of market distress, however, has been increased optimism about the global economic outlook. November retail sales in the US rose a stronger-than-expected 1.30 percent, businesses increased inventory levels, consumer sentiment has improved, and a number of forecasters have raised their estimates of likely GDP growth. In the OECD as a whole, while the Eurozone and the UK are looking distinctly more sluggish than the US , a gradual recovery is consolidating, the OECD's leading indicator rising again in October. But perhaps the strongest boost to investor confidence came from rapid growth in Asia , particularly from evidence that the Chinese economy is continuing to power ahead: its imports in November were running 26.70 percent up on a year earlier, and industrial production was up 19.20 percent. As noted last month, it's not surprising that shares have been treading water for the time being. While the world economy looks to be on the mend, investors are still not too sure about the potential for the likes of a Dubai event to derail the recovery. Investors may well elect to stay on the sidelines for a while yet until the data starts to point more definitely to a clear outcome.
Property - Outlook
The process of balance sheet strengthening and recognition of valuation losses is well-advanced by the standards of Australian or overseas counterparts, so the downside risk from further financial shocks is limited. The better-than-expected improvement in the local economic outlook is also helpful. As one example (taken from Treasury's Half Year update forecasts), back at the time of the 2009 Budget in May, 124,000 jobs were expected to be lost over the two years to September 2010. The expected job loss is now only 60,000. This means that the impact of the recession on household spending - the key variable for the retail property sector - and on employment - key for the office sector - will have been significantly less than originally feared. With financing issues well-advanced, and the economic fundamentals for the sector improving, the attractive yields relative to bank deposits or government bonds look increasingly worth pursuing.
Australian & International Property - Outlook
The Australian listed property sector is out of intensive care, but is still not fully-healthy. Investor sentiment has improved, to the degree that existing REITs have been able to raise new capital (some A$16.0 billion to date), and new IPOs are now being considered seriously with (according to media comment) the first likely to eventuate early next year. The steadily-improving economic outlook is also a plus. But the sector is still working its way through fixing the debt-financed excesses of the pre-credit crisis days. In Mirvac's case, for example, investors were paid some 60 cents per unit, whereas the last stated net tangible asset backing was 85 cents, suggesting that there are still valuation write downs to come. There's also the knock-on effect of debt problems: according to one estimate there are A$68.0 billion of wholesale unlisted property funds, with less access to new equity than their listed cousins but with some of the same refinancing problems, and their distress sales have the potential to weigh on property valuations.
It's much the same story for international as for domestic property: an improving economic outlook, but set against ongoing financial restructuring. Life has been a bit easier for the listed vehicles, which this year in the US alone have been able to raise US$35.0 billion of new debt and equity capital. But there's also the same theme of unlisted property funds under financial stress putting pressure on the value of property held by the listed vehicles. This is shown by the just-announced bankruptcy of Fairfield Residential, one of the largest US owners and developers of apartments, which had been unable to arrange refinancing. And while the outlook has improved for global activity in general, some countries are experiencing deflation (notably Japan ), with falling property values and rentals, a difficult backdrop. This remains an asset class where the prospects depend very heavily on exactly which sectors and countries investment managers select for their funds.
Cash & Fixed Interest - Outlook
Markets had been expecting for some time that the Reserve Bank would raise interest rates earlier than its official stance had been suggesting. The Bank moved in the markets' direction at its 10 December monetary policy statement, advancing its first likely increase from " the second half of 2010" (what it had said in October) to " around the middle of 2010" (now). The markets are still not convinced, however, and continue to expect earlier rises than the Bank. The futures market expects 90-day bank bills to be four percent by mid-2010 (the Bank says 2.90 percent), and to reach 5.30 percent by the end of 2010 (the Bank's view is 3.50 percent). Most of the fundamentals (commodity prices, the improving local economy, the prospect of higher interest rates) suggest that the $NZ could go higher from here.
International Fixed Interest - Outlook
Although the global economic outlook is improving, it's early days for most recoveries and in some countries the expected upswing is distinctly modest (notably in the UK and the Eurozone). This suggests that short-term interest rates are likely to remain very low to support economic activity for some time yet. The outlook for global government bonds remains a conundrum. Yields persist at exceptionally low levels, despite the prospect of very high levels of new issuance (normally requiring higher yields, and lower prices, to attract buyers) and the prospect of higher inflation rates in time as the world economy strengthens (which again would normally lead to higher yields). For corporate bonds, investors have been quick to cash in on the implications of the improving economic outlook. Barclays Capital, for example, is picking that the default rate for high-yield bonds will peak (at 13.0 -14.0 percent) early next year before dropping to 5.50 percent by the end of 2010, and investors have been buying heavily in anticipation of this better outlook. That made sense when the high-yield bonds were exceptionally cheap at the height of the credit crisis, but with prices for US high-yield bonds up over 70.0 percent this year (and European ones even more, 86.0 percent), there may not be much value left on the table.Performance periods refer to the month and three months to 15 December 2009.
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