Outlook for Investment Markets
Investors' concern levels have risen as possible sovereign debt defaults and mixed evidence about the scale and speed of recovery in global economic activity have affected confidence. Growth assets have suffered and corporate risk premiums have widened. Looking ahead, however, the consensus view is still for a gradually strengthening world economy and ongoing growth domestically. Allowing for occasional bouts of anxiety, growth assets should still do well in this environment.
Australasian Equities - Outlook
The New Zealand business community and forecasters both expect better times ahead compared with 2009. The most recent business responses to The National Bank Business Outlook Survey showed expected improvements in activity, investment, hiring, exports, and (importantly for the sharemarket) profits. Even though the more nebulous 'confidence' measure has
been slipping (as have the most recent consumer confidence surveys), forecasters also agree that the outlook for business activity is on the mend. Latest consensus forecasts collated by the New Zealand Institute of Economic Research now expect the March year just finishing to show only a small GDP decline of -0.40 percent, while growth in the next two March years is forecast to be 2.70 and 3.40 percent respectively, outcomes that would be respectable by OECD standards.
Australia came through the global recession in good shape by OECD economy standards, with positive GDP growth in 2009 and a much smaller-than-expected rise in unemployment. The outlook continues to look good. As Reserve Bank Assistant Governor Phillip Lowe pointed out in a recent speech, Australia has been lucky to find itself in the faster bloc of a "two-speed world", well-placed to sell into strong Asian growth. While the occasional indicator is weak, most point to a good year ahead, particularly the Westpac/Melbourne Institute leading indicator. Consensus forecasts have the Australian economy growing by three to 3.25 percent a year over the next two years. If there are no policy mistakes such as a premature monetary or fiscal tightening and absent any double-dip global downturn or other unpleasant surprise, the outlook for the Australian sharemarket continues to look supportive.
International Equities - Outlook
There are several key reasons for the wobbles that have hit world sharemarkets since January. The first is the fear of problems emanating from the 'PIGS' economies of Portugal, Ireland/Italy, Greece, and Spain. Concerns centre in particular on the impact of any sovereign debt default, especially if concentrations of holdings of (say) Greek debt at some financial institutions were to lead to another flare-up of the global credit crisis.
A second reason for sharemarket weakness has been fluctuating opinions about the strength of global economic recovery. Markets have been very sensitive to any hints that the recovery might not be on track. A very recent example was the near-global sell-off on news that the Conference Board's indicator of US consumer confidence had dropped unexpectedly.
A third reason has been concerns about the eventual tightening of fiscal and monetary policies that is inevitable in the developed world. Deficits in the order of 10.0 percent of GDP (as in the US at present) will need to be wound back, and ultra-easy monetary policy will need to move back to more normal conditions to avoid either inflation or another round of cheap money-fuelled asset price bubbles. There has been intense interest, for example, in the US Federal Reserve's decision on 18 February to raise its emergency discount rate (to a still very low 0.75 percent), even though the Fed argued that the move did not "signal any change in the outlook for the economy or monetary policy". Finally, some sort of slowdown might have been expected for global shares after the strong rises through 2009.
There's still good reason to expect a global recovery to become more obvious as 2010 unfolds. Asia is recovering very quickly (as latest GNP data out of Taiwan has shown); China is still powering ahead (with a consensus forecast of 9.70 percent growth this year), as are some other large emerging economies; and a modest recovery looks likely for the US economy, where the Wall Street Journal's forecasting panel is picking three percent growth in 2010. While there are still weak spots - notably the Eurozone, especially its peripheral members; the UK; and Japan - and risks - sovereign default, ham-fisted stimulus withdrawal, and left-field 'accidents' - the outlook for global business activity looks better than in 2009. Whether sharemarkets will have confidence to place their bets on that outlook remains to be seen. They may need more birds in the hand before then.
Property - Outlook
On the face of it, the better-than-expected economic outlook and the high tax-paid yield from the sector (11.0 - 12.0 percent for most of the big names, except Property For Industry, which is 9.5 - 10.0 percent) ought to be drawing in more investor interest than has been the case. Investors are evidently waiting to see what tax changes are in store for the sector in the 20 May Budget. Although there has been some indication from the Minister of Finance of some of his likely changes (aligning the top rates of personal and trustee tax, but not the company rate), there's still no clarity about the property-specific ideas proposed by his Tax Working Group, which may include limits on depreciation. A secondary concern is the state of the office market, particularly in Auckland, where oversupply has emerged (and triggered the emergence of a so-called 'vulture' fund, Blacksmith Property, which hopes to pick up offices at ultimately profitable distressed prices). Investors may stay on the sidelines until there is greater clarity about tax in particular.
Australian & International Property - Outlook
Operating earnings from the Australian listed property sector are picking up, devaluation hits to capital values are lessening, and balance sheets continue to be repaired, all of which is however a gradual process. There may be increased M&A activity as the stronger survivors pick off their weaker brethren. However, the sector's not especially cheap in terms of discount to net assets and the pick-up in yield relative to Commonwealth bonds is only modest (0.50 percent or so, adrift of what's available from corporate bonds), so investors may continue to wait until restructuring risks are out of the way.
There's been little fundamental change to the outlook for the global property sector, where the main points are the benefits of a gradually improving global economy and ongoing balance sheet restructuring. This is overlaid by very different prospects from one market to the next - regional indices show a very volatile mix of market by market performance - and the overhang from sectors still in trouble (notably US commercial property, which US regulators have mentioned recently as an ongoing issue).
One encouraging development is evidence of greater investor confidence. The UK Investment Management Association has found that retail investors, substantial net sellers of property funds in 2008, turned increasingly positive on the sector throughout 2009. This may say more about retail investors chasing yield when returns from government bonds and bank deposits are so low than about the prospects for the sector. Overall, this is an area where active, market by market and fund by fund management will remain very important for investment performance.
New Zealand Cash & Fixed Interest - Outlook
The main change likely in coming months will be higher short-term interest rates. The Reserve Bank of New Zealand's last statement said "we would expect to begin removing policy stimulus around the middle of 2010", and the futures market is picking that 90-day bank bills will be 1.50 percent higher by the end of the year. The markets have however in recent months tended to expect more, faster, from the Bank than it has been prepared to do. Respondents to the Reserve Bank's latest survey of expectations expect that the 10-year yield will be 6.10 percent at the end of this year. They also are picking little change in the value of the $NZ, end-year levels of 70 US and 80 Aussie cents expected.
International Fixed Interest - Outlook
There's little prospect of currently ultra-low interest rates rising appreciably soon, as recovery in the developed world is still fragile. The futures market expects the US Fed funds rate to have risen to only 0.50 percent by the end of this year. Pressures leading to higher government bond yields are growing because of the massive supply of new bonds, the gradually firming global economy, the increased prospect of inflation, and increased concerns about the more indebted sovereign issuers. And it looks as if the huge rally in corporate bonds has finally run its course. The massive corporate debt rally looks to have peaked in January. Investors may still be interested in earning the risk premium income from corporate credit, but large capital gains from here now look unlikely.Performance periods refer to the month and three months to 24 February 2010.
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