September 2008 Quarterly Review
GLOBAL ECONOMY
Economic conditions in the United States weakened over the quarter with lead indicators falling and unemployment rising sharply to 6.1%. European growth has slowed significantly with lead indicators pointing to an unfolding recession. Asian growth is also easing, albeit from high levels. Whilst domestic demand has increased Asia remains reliant upon business investment and exports, both of which are at risk of dropping markedly.
Australian economic growth slowed during the quarter. Generally the economy remains mixed with mining states being strong versus New South Wales which is weak. Recent business confidence, retail sales and unemployment figures indicate that growth in Australia may have stabilized.
Table: Global Growth Forecasts
|
|
2007 |
2008 |
2009 |
|
World |
4.9% |
3.8% |
3.7% |
|
United States |
2.0% |
1.6% |
1.4% |
|
Europe |
3.0% |
1.8% |
1.4% |
|
Japan |
2.1% |
1.3% |
1.2% |
|
China |
11.9% |
9.9% |
9.2% |
Source: Consensus Economics
NEW ZEALAND ECONOMY
The New Zealand economy was officially in recession in the first half of 2008 and most economists forecast negative growth for the September quarter. The housing market has turned with a sharp slowdown in sales starting to feed through to prices and further price falls are probable. Monetary policy has started to ease but many households and companies will not benefit from lower rates as banks are keen to maintain margin levels given higher offshore funding costs.
NEW ZEALAND DOLLAR
The NZ dollar had a mixed quarter. It fell sharply (12%) against a resurgent US dollar but was more stable against other currencies which had weaker than expected economic data. In fact the Kiwi dollar actually rose against the Australian dollar by 7% over the quarter.
SHAREMARKETS
In what was one of the most volatile periods in financial market history, all major sharemarkets were down for the September quarter in their local currency. New Zealand was actually a top quartile performer with a negative 3.3% return for the period. The MSCI World Index was down 11.3% in local currency but was down 3.3% in NZ dollars (100% unhedged).
There was a huge variation in returns for stocks in the NZX50 Index. The top performers for the quarter were: Steel & Tube (+51.1%), F&P Healthcare (+24.7%) and Sky City (+24.5%). The three worst performers for the quarter were: Pike River Coal (-34.7%), PGG Wrightson (-29.4%) and NZ Farming Uruguay (-27.0%).
FIXED INTEREST
New Zealand bonds were the best performing sector for balanced fund investors over the quarter. Government and most corporate bond yield rates fell significantly over the period, generating reasonable capital gains. The reduction in NZ interest rates was supported by a surprise easing in the OCR by the Reserve Bank of New Zealand by 0.5% to 7.5%.
PROPERTY
The fundamentals for New Zealand commercial, retail and industrial property have deteriorated with demand muted and supply increasing.
OUTLOOK
We continue to have a very cautious outlook for the global economy and global financial markets. The unwinding of high consumer and financial leverage will take time. Savings rates need to increase to offset wealth destruction from housing and financial markets. Confidence is likely to remain weak and rising unemployment will impact negatively on economic confidence and growth.
Asia is not immune from a global slowdown although strong fiscal positions may allow governments to provide some stimulus and falling inflation should also help. China has eased policy but still faces the reality of lower growth rates. The European outlook is weak and mixed across countries. Europe has some room to reduce interest rates as inflation falls and a falling Euro should also help.
Poor global growth should lead to lower inflation and interest rates and eventually provide stimulus for some economies. Falling petrol and food prices should also be a boost for consumers but problems with debt levels, lower house values and rising unemployment are still likely to dominate consumer sentiment and depress consumer spending.
OECD lead indicators point to continued weak economic growth as evidenced by lower commodity prices. So our base case is for falling global growth with risks to the downside especially if China slows.
The short-term economic outlook for Australia is mixed. It has been supported by tax cuts, low unemployment and strong commodity prices. However, the impact of tighter credit conditions and falling commodity prices, stock markets and house prices are having a negative impact. On balance Australian growth is likely to remain subdued in the short-term. Over the medium-term the economy has significant support from the mining sector and through the possibility of lower interest rates and future tax cuts.
New Zealand faces several headwinds including wealth destruction in the housing and financial markets, high inflation and still tight monetary policy. A lower Kiwi dollar should help exporters but this may be offset by lower demand for our products due to slow global growth. Tax cuts and interest rate cuts also provide a boost to consumers. However, these will take time to flow through and any gains are likely to be saved rather than spent.
Our expectation is for continued low growth for New Zealand over 2009, with domestic demand remaining subdued and exporters benefiting from a lower kiwi dollar but also facing lower global demand levels.
Given our outlook it is our current intention to:
1. Remain cautious in terms of our overall asset allocation. This means we retain our increased allocation to income assets for most clients with an under weighting in growth assets. This includes an allocation to offshore cash, offering some exposure to further expected falls in the Kiwi dollar.
2. Maintain the overall exposure to New Zealand equities at current relatively low levels. The existing bias to defensive domestically oriented companies and to exporters will continue. We are also looking closely at over-sold opportunities in the sector.
3. Maintain current exposure to Australia and international equity weightings but review some existing sector exposures.
4. Continue to take advantage of the attractive yields on high quality corporate bonds to maximise the gains that are occurring as short term interest rates fall due to a weak New Zealand and global economy.
5. Avoid listed property companies with high debt levels, retail exposure or development risk.
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