Investment market update (for the quarter ended 31 July, 2021)
Globally, the majority of share markets continued to climb higher, with many sitting at or near record highs. Markets have been driven higher by a combination of:
- Companies generally delivering better-than-expected earnings results benefiting from a combination of improving economic activity and significant cost savings.
- Central banks and governments remaining committed to “loose” policy settings, including ultra-low interest rates, which continue to underpin very healthy growth in economic activity, and support demand for higher risk-return investments such as stocks.
- Vaccine roll-outs in Europe and the United States boosting hopes that rising cases of the Covid-19 delta variant will not lead to further lockdowns. Vaccines have proved effective in substantially reducing the proportion of people who catch the virus getting seriously ill.
New Zealand has remained a laggard
The New Zealand market is dominated by defensive dividend-paying stocks, which many investors look at as an alternative to fixed interest investments such as bonds or term deposits. The firming in long-term interest rates over the past nine months has generally been a headwind for these stocks.
The Reserve Bank of New Zealand (RBNZ) likely to lead interest rate hikes globally
Until very recently the message from our own RBNZ was consistent with this “wait and see” approach. But, in the past month, the outlook has shifted sharply. It now appears to be a two-horse race between the RBNZ and Norway’s Norges Bank as to who will be the first developed market central bank to hike rates in a post-Covid world.
There are a number of reasons we believe the inflation we are seeing in New Zealand is likely to be stickier (and therefore more concerning for the RBNZ) than in other countries:
- Whilst the rest of the world has been grappling with restrictions and lockdowns, New Zealand has largely (with the exception of tourism and border movements) been in a post Covid-19 economy since the middle of last year. Consumers — without the burden of Covid fears — have responded to ultra-low interest rates by breaking out the credit cards.
- The New Zealand economy is facing pent-up demand and capacity constraints — the housing shortage being the most obvious example — from the tidal wave of migrants over the last eight years. In recent years, that same migration kept a lid on wages. But now, with borders shut, capacity pressures are biting.
- New Zealand is a small, open economy a long way from most trading partners. The delays in supply chains and dramatic jump in freight prices are disproportionately impacting import costs for our businesses.
Invest locally and globally
Over the past decade or so, a home market bias to New Zealand would have been very beneficial. Our high dividend yielding market has been one of the top performers globally.
A large part of this return has been from investors’ willingness to pay a higher price for the income generated by businesses in sectors such as utilities, telecommunications, and property. We believe the shift in the direction of interest rates means this benefit is now likely at end.
That isn’t to say you should throw the baby out with the bathwater. There are still high-quality companies in New Zealand we are happy to remain invested in. But, it does mean having adequate diversification (always a mainstay of any investment plan) across markets and sectors may prove even more important than usual. As always, whether regarding adequate diversification or any other questions you may have, your Forsyth Barr Investment Adviser is available to discuss your investment plans at any time.
This column is general in nature and does not take any of your personal circumstances into account. For personalised financial advice, contact Forsyth Barr for an overview of the services we can provide.
Read: Inflation is here …