High global debt dampening economic rebound

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Economic growth and political concerns remain elevated, despite asset prices recovering over the quarter ended 28 February 2019.

A reversal of Central Bank policies away from increasing interest rates towards more accommodative policies helped asset prices stabilise. In China, policy stimulus has begun to positively impact credit growth, addressing fears of an economic slowdown. 

Further progress on solving global trade disagreements is still required for global economic growth to rebound. 

However, even if this occurs, the high level of global debt is likely to prevent economic growth rebounding strongly. 

Housing market weakness, now emerging in more  developed economies is expected to be a further drag on global economic growth.

Markets reset 

In response to Central Bank policy decisions, positive equity market returns in the first two months of 2019 offset the negative end to 2018. 

Financial conditions are expected to be supportive of markets for the foreseeable future, however risks to earnings growth are becoming more elevated.

In the recent New Zealand company reporting season, downgrades to FY19 forecast earnings outpaced advances
by 2:1. 

In Australia, the weaker housing market is likely to see a similar result from companies there, with the trend of upping dividend payments and share buybacks at the expense of investment, likely to provide a further challenge to achieving earnings growth forecasts. 

Given the cyclical challenges (both regionally and in the global economy), investors now favour defensive sectors and asset classes. 

This should reduce return expectations. We expect low inflationary pressures to provide sufficient comfort to Central Banks to keep interest rates low. This ongoing stimulus should reduce risks of a collapse in economic growth. 

However companies will need to deliver earnings growth if markets are to strengthen further. 

We note that earnings growth is becoming harder to find, although opportunities still exist for selective investment within the various global markets.

Income/structural growth over cyclicals

Any financial market weakness in 2019 is expected to arise from economic rather than just financial market reasons and we don’t expect any major credit event to disrupt markets. 

Labour markets should remain relatively firm, which will ensure consumption ticks over, albeit this may increasingly pressure costs. 

Domestically, weaker growth in house prices and tightening credit conditions (as financial institutions are forced to hold more capital against loans) are also likely to impact investor sentiment. 

Accordingly, despite cyclical growth investments (such as the retail sector) increasing in attractiveness from a valuation perspective, defensive income-generating investments (such as the listed property sector) and companies with the ability to grow earnings regardless of economic conditions (such as the healthcare sector), remain preferred.

This column is general in nature and is not personalised investment advice. This column has been prepared in good faith based on information obtained from sources believed to be reliable and accurate. Disclosure Statements for Forsyth Barr Authorised Financial Advisers are available on request and free of charge.

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Brett Bell-Booth

Investment Advisor with Forsyth Barr Limited in Tauranga. Phone: (07) 577 5725 or email brett.bell-booth@forsythbarr.co.nz

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