Outlook for Investment Markets
The key development across all asset classes has been the impact of increased investor confidence about the outlooks for the credit crisis and the global economy. Providing this is not derailed by further twists in the credit crisis saga, it should lead to increased demand for growth-related assets and less demand for 'safe haven' assets such as government bonds and the $US. Both local and global property are likely to lag, however.
Australasian Equities - Outlook
The immediate economic outlook is similar for both New Zealand and Australia. Both economies are going through the same sort of slowdown occurring in many other developed economies, though not to the same extent as in the UK, the Eurozone or (especially) Japan. In New Zealand, latest consensus forecasts are that the economy will contract 0.60 percent in the year to March 2010, but then grow at a modest 2.70 percent in the following March year. This is almost identical to the outlook for Australia, where Treasury forecasts from the recent Budget are now picking growth to fall 0.50 percent for the year to June 2010, followed by a modest 2.25 percent recovery the following year. This would not be a bad outcome by international standards, and reflects both vigorously expansionary fiscal and monetary policies and comparatively modest exposure to the worst of the credit crisis. Australia's banks, for example, came through in better shape than their counterparts in the UK or the US. This in turn creates a reasonable backdrop for local shares to perform, although Australian prices have already run up quite fast in anticipation of better times, and could easily plateau, waiting for confirmation that the cycle has indeed turned.
International Equities - Outlook
World sharemarkets have taken heart from the improved financial sector outlook. One of the measures frequently used to indicate the degree of sharemarket investor worry, the VIX index of US market volatility, dropped significantly in April and May. It's still on the high side by historical standards, however, suggesting that while investors are less worried than they were, there are still uncertainties in the final twists and turns of the saga. It's also encouraging that the extra margins banks have had to pay for funding compared to what the US government pays has been falling sharply, reflecting significantly less worry about the banks' standing. Investors have also been cheered by signs that the US recession in particular appears to be bottoming out. After many months of revising down their forecasts, economists are now more convinced that the current June quarter marks the low point for the US economy, and that growth will resume in the September quarter and continue to pick up from there. Similarly, there are stronger expectations that the Eurozone saw the worst in the March quarter (when GDP fell by 2.50 percent), business confidence indicators having subsequently improved. World sharemarkets have run pretty hard in anticipation of the economic turning point, and it would not be surprising if they trod water for a while until the expected recovery becomes clearer, but the worst looks past for world sharemarkets.
New Zealand Property - Outlook
Although run more conservatively than their Australian and overseas counterparts, the local property trusts have had to cope in recent months with a similar menu of issues revolving around strengthening their balance sheets. This has involved increasing their equity base, at a cost to the previous share price (Kiwi Income Property, for example, has just raised NZ$50.0 million from institutional investors); refinancing existing debt (AMP Office), and selling down some properties. The trusts are also conserving cash by cutting dividends, and have been announcing large losses due to write-downs on their portfolios. The income from the sector still looks attractive, but investors may well remain shy of the sector while these balance sheet issues work their way through.
Australian & International Property - Outlook
The Australian listed property sector's relative weakness reflects ongoing structural problems. The sector has essentially been reduced to Westfield; a small number of survivors which have managed to recapitalise with new equity (including both GPT and Stockland in recent weeks), but at discounts to pre-existing share prices; and a long tail of zombie companies with little realistic prospect of refinancing or recapitalisation. Until the outstanding problems are dealt with, investors are likely to remain wary of the sector. Many of the same issues also apply to overseas trusts. There's also the likelihood that banks will move to clear up lending to the terminal property companies, which will increase supply onto a weak market. The worst may be past, but the global property sector is still a long way from re-emerging as a healthy asset class.
New Zealand Cash & Fixed Interest - Outlook
The Reserve Bank is likely to leave short-term interest rates where they are, and the futures market is predicting rates will stay on hold out to the end of the year. The key influence is likely to be the prospect of an easing - or even an end - to the credit crisis. If investor confidence continues to improve, government bond yields will continue to rise as demand reduces for a bolthole, and corporate bond yields fall as refinancing and default risks ease. Similarly, demand for currencies like the $NZ will improve if investors feel more comfortable.
International Fixed Interest - Outlook
Short-term interest rates will remain low as central banks everywhere run supportive monetary policies. In the US, for example, futures market prices show that the Fed is not expected to reverse its current almost-zero interest rate policy before the middle of next year. Government bond yields have started to rise, a logical response to increased confidence about the improved outlook for the credit crisis. Similarly, the sharply-higher financing costs that all borrowers - good and bad - had to pay in the wake of the credit crisis are likely to continue to come back to more reasonable levels.
Performance periods refer to the month and three months to 20 May 2009.
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