March 2009 Quarterly Review
GLOBAL ECONOMY
Global economic growth has fallen dramatically over the past six months. The slowdown has been synchronised with no economic region being spared – the US, Europe and Japan are particularly weak. In response to slow growth central banks have slashed rates and the US and UK central banks are purchasing bonds to boost the money supply. Governments around the world are also applying significant fiscal stimulus in the form of tax cuts and increased investment.
A key outcome of slowing growth has been rapidly rising unemployment rates. In response to this consumer savings rates have risen sharply, accentuating the growth slowdown.
The Australian economy contracted in the 4th quarter with business and consumer confidence remaining relatively weak. Retail sales have been relatively robust following large cash handouts from the Government. Unemployment has started to rise from a low of 4.1% to 5.2% currently.
NEW ZEALAND ECONOMY
Economic conditions in New Zealand remain weak with the prospect that four quarters of negative GDP growth will stretch into a fifth or sixth quarter. Sharply slower trading partner growth has put downward pressure on the country’s exports as seen by falling commodity prices.
Domestic demand also remains subdued given increasing economic and job uncertainty and lower house prices. Against this, significant stimulus has been applied through sharply lower interest and tax rates and increased government spending. Approximately 40% of households will come off fixed rate mortgages this year.
SHAREMARKETS
Global Equity markets continue to be extremely volatile. For example the the US sharemarket (S&P 500) was down 12.8% for the quarter, in US dollar terms. This is the sixth straight quarter of declines with the S&P 500 down 48% over this period (in US$).
The New Zealand NZX50 Portfolio Index fell 4.6% during the quarter. Earnings news generally remains mixed with few companies doing well and most giving little guidance or confidence in the future. The Australian share market has fallen 20% over the past six months (S&P/ASX 200) with capital raisings by companies a feature of that market in recent times.
FIXED INTEREST
The Reserve Bank of New Zealand (RBNZ) cut the cash rate to 3.0% during the quarter. Longer term interest rates rose toward the end of the quarter as an increasing number of borrowers looked to lock into longer term mortgage rates.
Global bond performance has been relatively volatile reflecting the continued problems of the US financial system. However, recent moves by the US Federal Reserve should help performance in this sector.
CURRENCY
The NZ dollar fell sharply during the quarter on the back of increased risk aversion. However, it recovered most of these losses following a sharp weakening of the US dollar. The US$ weakened following the Fed’s decision to buy US government bonds while the NZ$ gained against the Japanese Yen given the terrible recent Japanese economic data.
ECONOMIC OUTLOOK
The global economic outlook remains poor. To date massive economic stimulus has been offset by wealth destruction (houses and savings), a dysfunctional global banking system and a lack of job security, which is curtailing consumer spending.
The key to the global growth outlook is the effectiveness of policy to help boost confidence and lending, borrowing and spending. Given the high degree of consumer and financial leverage we believe that economic growth is likely to remain poor. Consumers and companies are likely to continue to increase savings and repair balance sheets.
We feel the most likely scenario is that the global economy will ultimately stabilise at some lower point before starting to grow again slowly. Whether we have reached that point yet is uncertain – economic indicators remain generally poor in the short term. Additionally, we do not expect growth to rebound sharply once it has stabilised with low to moderate growth likely to be a feature for some time to come.
NZ economic growth faces several headwinds including very weak trading partner growth, rising unemployment and weak confidence. Tax cuts and interest rate cuts will provide a significant boost to consumers. However, these are likely to be used to reduce debt, increase savings or bring expenditure more in line with income.
A lower kiwi dollar should help exporters but at this stage is probably more than offset by lower demand for our products. Our base case is for continued low growth in New Zealand over 2009. Risks remain given the possibility of rising unemployment, continued falls in house prices and New Zealanders high level of debt relative to incomes.
MARKET OUTLOOK
Equity valuations based upon current earnings are attractive compared to very low cash rates. However, the outlook for company earnings remains poor and very uncertain given the very weak economic backdrop.
Given opposing forces of valuations and earnings equities are likely to remain volatile and direction will depend upon confidence in markets. As we have seen recently any sense that growth and earnings have stabilised is likely to see large market rallies. We believe confidence is likely to remain fragile given the poor economic news flow, particularly with regard to unemployment.
On the fixed interest side New Zealand inflation pressures are likely to be minimal meaning that the RBNZ is likely to keep rates low for some time. However, increasing issuance from borrowers is likely to keep pressure on yields, particularly in terms of long-term rates.
