Outlook for Investment Markets
Growth forecasts for 2010 remain generally positive notwithstanding shorter-term events such as Dubai and Greece's debt woes. Recovery is clearly underway, but economic policies will not be as supportive as they were in 2009, and the bulk of the improvement in asset prices may already be in the bag for the time being.
Australasian Equities - Outlook
The New Zealand economy is on the mend, which is positive for the local sharemarket. It's not a rip-roaring recovery, and is distinctly less vigorous than the upswing in Australia, but it is a recovery. Improving export earnings and government policy stimulus have contributed to a pick-up in household spending, although credit growth, business spending, and the labour market remain weak. New Zealand share valuations are not especially demanding, but the outlook appears to be one of slow recovery, suggesting that the sharemarket recovery will be equally protracted. The Australian economy has come through the global recession with much less damage than originally predicted. Employment growth has been solid (31,400 new jobs in November, another 35,200 in December), and the unemployment rate has fallen to 5.50 percent. There is clearly still a good macroeconomic environment for Australian companies, and stronger balance sheets after recent recapitalisations. 2010 may not, however, be as good a year as 2009. The higher $A will take its toll on exporters' competitiveness and profits, and higher interest rates on businesses more generally. Near-term valuations look expensive, and profits will have to validate those valuations - the performance of the market depends on companies not disappointing earnings expectations.
International Equities - Outlook
The global economy is improving, although the prospects vary widely from country to country and region to region. The US is clearly on the mend, annualised GDP growth in the December quarter a strong 5.70 percent. Consumers have increased their spending and consumer confidence is on the rise, exports are going well, and businesses are spending more on equipment. Growth has also been stronger-than-expected in China, which grew by 8.70 percent last year, a little above the official target, and consensus forecasts for Chinese growth remain very strong at 9.70 percent this year and nine percent in 2011. With other large emerging economies such as India also expected to do well, the developing world will make a significant contribution to the global recovery this year. Growth in the Eurozone will be both low and fragile, and vulnerable to economic policy mistakes such as the premature removal of economic stimulus. Overall, the outlook for international shares is for support from a recovering global economy, but the outlooks are diverse for the differing economies and regions.
Property - Outlook
The fundamentals for the New Zealand listed property sector continue to improve, among them undemanding valuations, better balance sheets (although the Kiwi trusts were never as indebted as their Aussie and overseas cousins), an improving economic environment, and attractive income yields. Set against this are substantially increased CBD office supply in Auckland and Wellington, and potentially unfavourable changes to the tax treatment of investment property. Although the Government's advisory group is primarily targeting the DIY personal investor, the possible solutions (changes to depreciation, taxing a deemed rate of return from property, and/or a land tax) are unlikely to bring joy to the listed sector either.
Australian & International Property - Outlook
The evolution of the Australian economy has clearly been very positive for listed property. A large rise in unemployment, increasing vacancies, and setbacks to tenancies have not after all eventuated, unemployment has fallen and consumer and business confidence surveys are both at solid levels. Recapitalisation is also well-advanced, and the property trusts' indebtedness levels have fallen. While the restructuring is still not quite complete, the outlook is certainly considerably brighter than may have seemed possible a year ago. The prospect of improving global business activity in 2010 makes for a more positive outlook for global property. However, the restructuring process after the credit crisis is significantly less well-advanced than in the local listed property market, and global property markets still have to work through this.
New Zealand Cash & Fixed Interest - Outlook
At its latest Official Cash Rate review on 28 January, the Reserve Bank stated that if the economy continues to recover in line with December projections, "we would expect to begin removing policy stimulus around the middle of 2010". Latest inflation figures have been encouraging - there was an 0.20 percent fall in the headline rate in the December quarter, and underlying inflation was also benign - suggesting that that the Bank has time to make a considered decision. Rising short-term rates will make cash more attractive, although the running yields on corporate debt are more attractive still. The $NZ remains overvalued, and will probably head lower in time, one potential catalyst being the recovery in the $US which looks underway.
International Fixed Interest - Outlook
Performance periods refer to the month and three months to 28 January 2010.
Below-trend world growth with no inflationary pressures because of spare productive capacity is a comfortable environment for government bonds. The huge volumes of new government debt would normally send prices down, but demand from risk-averse investors, central banks, and banks building up the liquidity of their balance sheets will absorb much of the new supply. This suggests few sharp rises or falls in bond prices on the horizon. Corporate debt remains more attractive, given the higher running yield and the prospect of a further tightening in credit spreads boosting prices.
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