A reminder of reality

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Investment Market Update for the quarter ended 31 May 2019

Global economic growth, and in particular developed economy growth, has been pared back significantly since December 2018. 

Global manufacturing has been in a slump most of this year, with export powerhouses such as Germany and Japan likely to be suffering manufacturing recessions. On the positive side, employment growth has continued in most economies and rising household incomes have underpinned a more robust service sector.

Weaker growth outlooks have caused Central Banks to reverse any policy bias towards further monetary policy tightening. As inflationary pressures have eased and economic data has softened, global bond yields have fallen. In China, the government has cut taxes and reduced interest costs in a bid to support the Chinese economy. New Zealand’s Reserve Bank cut the Official Cash Rate and other Central Banks have indicated further support will be forthcoming if needed.

With limited reinvestment options, and interest rates expected to stay low or lower for some time, alternative investment options need to be considered.

This monetary support, along with an expectation of a resolution to the US-China trade dispute, has lifted asset prices this year. However, in recent weeks as economic data has deteriorated and the trade dispute worsened, weakness has returned to market sentiment. 

Interest rate curves are now indicating rates will remain low for longer, with the US Federal Reserve expected to cut interest rates at least once later this year. Weakening market sentiment and economic growth also confirms the need for a premium-for-risk when investing in growth assets.

Financial market impacts

With trade concerns again escalating, the renewed focus on declining economic growth expectations meant most equity markets we follow declined during May 2019. 

US and Chinese markets bore the brunt of declines, and using the MSCI World Index as an example, the declines were sufficient to reverse the gains made in the preceding two months. At least the weaker New Zealand dollar helped returns from a New Zealand investors’ perspective, with the Kiwi falling against all currencies with the exception of the British pound.

Australasian markets were the best performers and managed to buck the trend of losses during May 2019. Australian equities actually gained significantly during May 2019 and managed similar returns to those in New Zealand over the quarter. 

Driving the Australian rally was the trifecta of the surprise General Election result replacing expectations of higher taxes with tax cuts, the banking regulator easing stress tests on mortgages, and the Reserve Bank of Australia indicating it would also lower the Official Cash Rate. These measures are expected to stabilise the housing market and in turn bolster household spending.

New Zealand’s performance was helped by the large weighting toward defensive sectors. However, good value-for-risk is becoming difficult to find. Momentum has been driving the market’s performance and the price-earnings multiples for these companies have increased significantly year-to-date.  

Part of the reason has been the level of acquisition activity in the New Zealand equity market. Other factors are low interest rates and insufficient issuance to offset the maturity and redemption of $1.8 billion of high yielding subordinated debt instruments, which will occur over the next few months. 

With limited reinvestment options, and interest rates expected to stay low or lower for some time, alternative investment options need to be considered. This includes more diversification into international bond funds, as well as having to accept lower than usual fixed interest returns.

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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About Author

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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