Australasian Equities - Outlook
New Zealand 's economic outlook is improving, as is the case for many other developed economies. As Treasury says in its latest Monthly Economic Indicators : "The recovery in New Zealand growth appears to have strengthened over the September quarter. Surveys show that activity and business and consumer confidence have recovered strongly over the past few months… the economy has continued to build on the tentative end to the recession suggested by the 0.10 percent rise in June quarter GDP". Recent Australian data has also been mostly positive, particularly October employment numbers. Forecasters have again been revising up their views of how 2010 will pan out. The Reserve Bank now expects growth next year of 3.25 percent, a full one percentage point more than it had reckoned on in its previous (August) forecasts. There may also be further upwards revisions to come. The Westpac-Melbourne Institute leading indicator has continued to rise sharply, suggesting solid growth ahead, and Westpac is forecasting four percent growth for next year. It's not hard to see why the sharemarket has liked the look of all of this, but the recent levelling out also indicates that investors are now likely to want to see further hard evidence of these improved prospects before taking shares further. This is especially true of New Zealand shares where, as the Treasury noted, there is an unusually wide gap between businesses' expected conditions (much more upbeat) and their assessment of current conditions (still very tough).
International Equities - Outlook
The global sharemarket recovery is an outcome of increased optimism about the economic outlook.
In its October World Economic Outlook , for instance, the International Monetary Fund stated that it now expects the contraction in global economic output in 2009 to be a little less than it thought three months ago (-1.10 percent rather than -1.40 percent), and upped its prediction of world growth in 2010 from 2.50 to 3.10 percent. Similarly, the OECD in just-released forecasts for its developed economy members now expects 1.90 percent growth next year (in June it had been picking only 0.70 percent), and for growth to keep on rolling into 2011 at a 2.50 percent rate. While forecasters are more upbeat than they were, it's also clear that there are still risks that might derail the expected improvement. The IMF, for example, noted that monetary or fiscal policy support might be withdrawn too early before a genuine widely-based recovery had taken place. Banks are still not strong enough to cope with another setback to their loan books. And the world economy is not robust enough to deal with a left-field event like a new flu pandemic or a new surge in oil prices. In these circumstances it's not surprising to see shares levelling out at their new higher levels: there have been good reasons for them to rise, but equally investors now seem to want to wait and see some further evidence that the outlook is indeed evolving along the expected path of improvement.
Property - Outlook
The New Zealand listed property sector has in common with its overseas counterparts been focused on balance sheet strengthening by locking in loan facilities and raising new equity. The broader economic outlook is improving, although in the retail sector the consumer is still being reasonably tight-fisted (retail sales were up only marginally in the September quarter). Investors seem only partially convinced about the outlook for New Zealand listed property, however, as the property stocks are for the most part still trading at significant discounts to net assets, suggesting that investors are wary of further asset devaluations in the pipeline. On the other hand, the sector continues to be very attractive yield-wise, especially when set against the low deposit rates on offer from the banks or the six percent on Government stock - grossed up for tax, yields from the leading names are in the 10.0 - 12.0 percent range.
Australian & International Property - Outlook
The Australian listed property sector has been focusing on balance sheet strengthening by locking in loan facilities and raising new equity. The economic environment at home and overseas has also been improving. Even Centro, whose refinancing problems started the rout in late 2007, feels that the worst is past, its chief executive recently noting "a stabilising retail environment in the US , with consumers starting to emerge and tenants, for the first time, considering expansion". Investors also seem more convinced about the outlook for the sector, as it is trading at only a slight discount to net tangible assets, suggesting that investors are not too worried about further asset devaluations in the pipeline. Whether yields around the 6.50 percent mark will be enough to support the sector remains to be seen, however: while beating Commonwealth bond yields, at current levels AREIT yields trail the returns from corporate debt.
The good news for the global property sector is that an easing of the credit crisis and an improving global economic outlook have justified rises in property shares from their distressed levels of earlier this year. The tougher news is that there's still a lot of work to do to restructure balance sheets, and some sectors have substantial workouts ahead of them. US commercial property is one example. Morgan Stanley has just handed the keys to its Crescent portfolio of offices and resorts (which had cost the firm $US6.50 billion at the top of the market in 2007) back to the bank which had lent $US2.0 billion to help pay for them. And in Japan , where economy-wide deflation is leading to falling rents and property values, the EPRA/AREIT index of Japanese property shares fell 16.0 percent over the past quarter. Global property will continue to be a market where specifics of companies, sectors, and economies will be paramount.
Cash & Fixed Interest - Outlook
The Reserve Bank of New Zealand stated at its 29 October monetary policy review that "in contrast to current market pricing, we see no urgency to begin withdrawing monetary policy stimulus, and we expect to keep the OCR at the current level until the second half of 2010". As the Bank noted, the markets have a different view and are picking the Bank to have started raising rates in the first half of next year, 90-day bank bills expected to be 0.75 percent higher by the middle of next year. For government bonds, yields are likely to be pushed up over time by a combination of reduced investor demand for 'safe haven' assets and the heavy weight of new bond issuance to support expansionary fiscal policy. The currency remains hard to call, but continued global weakness in the $US, improving commodity prices (notably for dairy), and improved investor risk appetites could see the $NZ remain in demand.
International Fixed Interest - Outlook
Among the major central banks only the Reserve Bank of Australia has so far started raising interest rates. Central bankers have begun to talk more about the risks of leaving rates at super-low levels for too long, and the European Central Bank has started cutting back the scale of its liquidity support . But most short-term interest rates are likely to remain low for some considerable time until it is absolutely clear that recovery is underway.
US forecasters, for example, are picking that the Federal funds rate will be only one percent at the end of 2010. Government yields are harder to read. One would not normally expect bond yields to stay so low in a world of recovering output, lower risk aversion, and very large volumes of new issuance looking for a home. The corporate bond rally that has accompanied the easing of the credit crisis has probably run most of its course.
Performance periods refer to the month and three months to 23 November 2009.
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