The consumer is king

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Investment Market Update, the quarter ended 30 November 2019.

The past quarter saw a substantial improvement in financial market sentiment. At the start of the period recessionary risks were being constantly highlighted. 

However, by the end of November, these concerns were regarded as over-blown. The consensus view now is that the global economic backdrop will improve through 2020. Sentiment has improved as consumer and business data has proved resilient in the face of trade tensions and other geopolitical risks. 

In New Zealand, stronger data has included a better than expected bounce in retail sales that, when combined with continued strength in our commodity prices, has led to our terms of trade (the price New Zealand receives for its exports compared with the price it pays for imports boosting the country’s earnings) hovering around record highs. This has also resulted in a surprisingly strong rebound in business confidence.

Underpinning the improved global economic outlook has been the strength of households (or consumers). Central banks remain committed to maintaining short-term interest rates near historic low levels. Low rates reduce the borrowing and debt servicing costs of consumers. 

Additionally, higher asset prices (including houses and equities) have created a positive “wealth effect”, boosting consumer sentiment. Lower rates have stimulated a pick-up in housing activity in most developed markets, including in New Zealand, Australia, and the US. This should flow through to improved consumer spending during the first half of 2020.

Low rates and an improving economic outlook encourage companies
Another consequence of low interest rates and greater confidence in the economic outlook has been a sharp resurgence in global corporate merger and acquisition activity. In November, on what’s been labelled “Merger Monday”, US$60 billion worth of deals were announced on one day. 

Deals included brokerage Charles Schwab agreeing to buy rival TD Ameritrade and France’s LVMH (the world’s largest luxury goods company) acquiring jewellery company Tiffany & Co. LMVH is reportedly funding its acquisition of Tiffany & Co with a bond issue paying less than one percent interest. 

Closer to home, in Australia, Canada-based convenience retailer Alimentation Couche-Tard made a bid for Caltex. In New Zealand in recent weeks we have seen Abano Healthcare’s Board agree to a takeover offer, and Metlifecare announcing that it has received an “expression of interest … to acquire the company”. We expect M&A will continue to be a theme of markets in 2020.

Investors have been rewarded for sticking to basics
The past quarter highlights how quickly the winds of economic sentiment can shift, and how nerve-racking markets can be for investors who focus on the daily geo-political and economic noise the media creates.

Investors who have stuck to core disciplines of a long-term focus and a diversified portfolio have been rewarded with the “market risk premium”, which means that higher long-term returns will compensate investors for bearing additional investment risk. While we don’t expect medium-term returns to continue to match those we’ve seen year-to-date, the returns we have seen do highlight the benefit of sticking to investing basics.

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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