Australasian Equities - Outlook
The worst appears to be past for the New Zealand economy, June quarter output-based GDP numbers showing an 0.10 percent increase after five successive quarterly declines. The less statistically reliable expenditure-based GDP measure showed a stronger rise of 0.40 percent, and both numbers came in above forecasters' expectations of another (-0.20 percent) decline. These increases may be marginal and within the margin of error, but at a minimum suggest that the economy has stabilised. It's also been helpful that Fonterra has announced an increase in its forecast payout to dairy farmers worth between NZ$750.0 million and NZ$1.0 billion according to differing estimates. This is all good news, but investors in local shares need to be mindful that recovery prospects in other economies are at least as good as at home, with the high $NZ in particular crimping the likely local improvement.
In Australia, the picture has been more clear, with a smaller and shorter cyclical downswing and earlier and stronger evidence of recovery. This has continued in recent weeks, the Westpac Melbourne Institute leading indicator rising again and forecasting Australian GDP to grow by 1.40 percent this year and a strong 3.80 percent in 2010. Both sharemarkets should benefit from the improving economic conditions, but the Australian market looks the more favoured.
International Equities - Outlook
Federal Reserve Chairman Ben Bernanke said in widely-quoted remarks in September that "Even though from a technical perspective the recession is very likely over at this point, it is still going to feel like a very weak economy for some time as many people still find their job security and their employment status is not what they wish it was". Most media comment focused on the "recession is over" part rather than on the qualifications to it, but their optimism appears to have been justified. Forecasters have become more confident about a US recovery, albeit a relatively modest one that may not see unemployment come down much over the next year and that will remain vulnerable to any unexpected shocks. The credit crisis is also continuing to ease, and attention has shifted from containing its downside risks to containing a premature return to extravagant bonuses at banks on the mend. Finally, growth prospects in the major emerging markets have firmed again. China is expected to grow by 9.30 percent next year, and India by 7.20 percent. The outlook is far from risk-free, but is substantially better than it was at the start of the year, and world sharemarkets are likely to continue to reflect the turnaround.
New Zealand Property - Outlook
The Kiwi listed property sector continues to mirror its Aussie counterpart, but writ smaller. While local debt levels and overseas adventures never reached Australian standards, the lengthy domestic recession, tight debt refinancing markets, and spooked investor confidence wrought their own damage. Local property stocks have responded like their cousins across the Tasman by booking writedowns in their annual results and strengthening their balance sheets, mostly through asset sales. Goodman, ING, and National have sold properties in recent months, and Kiwi Income is currently offloading a Christchurch office block. With the worst of the writedowns already booked, balance sheets stronger, the economic outlook improving, and yields attractive, the sector looks able to deliver further gains.
Australian & International Property - Outlook
News from the domestic listed property sector has continued to be dominated by accounting losses booked by the leading companies. According to Bloomberg data, in the year ended 30 June the 16 companies in the S&P/ASX200 AREIT Index racked up A$19.50 billion of losses, which included asset writedowns of A$21.70 billion. Westfield alone had asset devaluations of A$2.90 billion in the six months to June. The writedown and writeoff cycle is however well into its end phase. While there may still be further devaluations to come, results are likely to be very substantially better than those booked over the past year, as the economy improves and the benefits of less leveraged balance sheets and gradually improving debt costs come to book. With investor confidence recovering, the yield on the leading names - around seven percent for Westfield, GPT, and Mirvac, and eight percent for Stockland - is also likely to come more into play.
It's the same story overseas, improving economic prospects and recovering capital markets assisting the sector in general. US REITs have raised some $US12.0 billion in new capital over the past six months. The sector has however split into two classes of company: recapitalised survivors recovering from their lows, and a long tail of severely or terminally wounded entities. In addition, the laggard performance of the Japanese companies shows that investors are now differentiating between countries with better growth prospects, and those with a weaker outlook. (Japanese retail sales are still falling, and unemployment is still rising.) The global property sector is improving but the circumstances of companies and markets differ markedly, suggesting that stock selection skills will be paramount.
New Zealand Cash & Fixed Interest - Outlook
The Reserve Bank of New Zealand said in its 10 September monetary policy statement that it believed that "the decline in economic activity is coming to an end" - more on this below - and that "a patchy recovery is underway". But the Bank also said that "the forecast recovery in economic activity is based on monetary policy continuing to provide substantial support to the economy. We expect such support will be needed for some time. As a result, we continue to expect to keep the [Official Cash Rate] at or below the current level through until the latter part of 2010". No immediate change in short-term interest rates therefore looks on the cards, although as recovery develops the futures market is predicting that 90-day rates will be a full one percentage point higher by the middle of next year. Improving economic conditions and lower investor anxiety both point towards higher government bond yields over time and towards further reductions in the cost of corporate bonds. Currency movements are difficult to forecast at the best of times, but are especially so when investor sentiment is as volatile as it has been through the credit crisis and the global recession. If the improved economic and financial outlook holds, though, the $NZ could well continue to benefit.
International Fixed Interest - Outlook
As noted last month, "more of the same" looks the most likely theme for global bond markets. Central banks will be keeping short-term interest rates low. In its just-released monetary policy decision, the US Federal Reserve said that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period", and other central banks are likely to be thinking along similar lines. Government bond yields are not appealing, and at some point are likely to rise further as global growth resumes. Corporate bond yields have fallen substantially in a short period of time, and while more robust investor confidence may see further falls again, the bulk of the rise in corporate bond prices is probably behind us.
Performance periods refer to the month and three months to 23 September 2009.
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