Australasian Equities - Outlook
New Zealand economic news has clearly turned for the better. The Kiwi sharemarket's sharp rise in July and August was because of a rapid realisation that after a prolonged recession the data was pointing to better times ahead. Business opinion surged into positive territory during the September quarter, while the New Zealand Institute of Economic Research has catalogued accumulating evidence of improving economic trends. New Zealand is in many ways replicating what was happening in other developed economies - moving from recession into a better spot in the business cycle. The outlook for the New Zealand economy and sharemarket are therefore reasonably positive, although the upside potential from economic recovery is greater in other sharemarkets.
In Australia, September's employment numbers were among the more startling recent economic statistics. Instead of the forecast loss of 10,000 jobs for the month, there was actually a gain of 40,600, the vast majority full-time. The unemployment rate also inched down a little, from 5.80 to 5.70 percent. Add much-improved consumer and business confidence measures to stronger-than-expected retail sales and rising house prices and the picture is of an economy well on the mend from a slowdown that had been very modest by OECD standards. This clear evidence of an improving economy and healthier growth prospects makes for a very positive outlook for Australian shares.
International Equities - Outlook
There is now stronger consensus among forecasters and policymakers that global recovery is underway. The OECD's leading indicators index, which aims to pick up early signs of recovery in its 30 member economies, has now risen for six months in a row. This index is suggesting that the previous pace of decline for some economies is slowing, and for others that growth has resumed (or is about to). Germany , for example, now expects growth to have fallen by five percent this year (previously it had expected six percent), and also expects 1.20 percent growth in 2010. (While by no means stellar, this is better than the 0.50 percent expected earlier.) And the consensus forecast in the US is that growth resumed in the September quarter at a 3.10 percent annualised rate, and will continue at 2.50 - 3.0 percent in coming quarters. The growth engine remains the emerging market economies like China and India (where industrial production was up 10.40 percent on a year earlier in August) and companies exposed to these strong rates of economic growth.
Property - Outlook
New Zealand property shares remain relatively resilient compared to their overseas equivalents. This is in part because they are less leveraged, and in part because they are invested almost exclusively in domestic property, without adventurous overseas excursions. The sector has had to book devaluations as higher capitalisation rates (reflecting more expensive borrowing costs) fed through into lower property valuations. Unemployment is expected to keep rising into 2010, which is unhelpful for the office property market. While headwinds remain, progress already made in strengthening balance sheets, improved economic prospects, and a useful level of dividend yield all make domestic listed property more attractive than it has been for some time.
Australian & International Property - Outlook
The outlook for the domestic listed property sector is rosier than it has been for some time. The sector had struggled previously with a ho-hum economic outlook, the decimation of the sector in the global financial crisis, excessive debt, and ill-advised overseas adventures. However, some of these issues - such as the economic outlook - have receded, and the Australian real estate investment trusts (AREITs) have gone a long way down the track of dealing to the structural problems. The AREITs have been more proactive than their overseas counterparts at reducing leverage, have recapitalised effectively. This all adds up to an improved outlook, particularly the ability to weather future shocks better thanks to stronger balance sheets.
The same cannot be said for their offshore counterparts. Global REITs still have a lot more work to do to unwind troubled debt exposures, and are still in the early stages of raising new capital and selling assets to pay down debt. These processes of recapitalisation and deleveraging will provide headwinds until the process is considerably more advanced.
Cash & Fixed Interest - Outlook
The Reserve Bank of New Zealand indicated at its 10 September review that it expected to keep the official cash rate at or below current levels until the latter part of 2010. However, this seems unlikely given the stronger growth and higher house prices. The Bank may even have arguably taken interest rates too low and have to move more aggressively in the near future. The futures market, for instance, currently expects 90-day bank bills to have risen to around 4.50 percent by the middle of next year. Even then, yields would be substantially below those available on government debt, reducing the attractiveness of cash from a yield perspective. The $NZ may still have considerable momentum against the $US, while the fact that the $NZ and $A tend to be beneficiaries of more settled investor confidence may also continue to support the $NZ against the $US in particular.
International Fixed Interest - Outlook
Monetary policy in the developed world is likely to be support ive for some time. The futures market is expecting the US federal funds rate to be around 1.25 percent at the end of 2010. The fiscal deficits needed to support economies in recession will require substantial volumes of government bonds to be issued, which is likely to drive yields up and prices down. The yields on global government bonds do not look attractive from a longer-term perspective, but there does not look to be any immediate selloff. While corporate bonds have already rallied substantially, risk premiums continue to decline, which is likely to lead to further (though smaller) increases in corporate bond prices.
Performance periods refer to the month and three months to 19 October 2009.
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