September 2009 Quarterly Review
GLOBAL ECONOMY
Global economic activity rebounded during the quarter, following the aggressive destocking earlier in the year. Growth has also been boosted by very expansionary monetary and fiscal policy in most regions. Chinese growth has been particularly strong helped by expansionary policies, including a significant easing in credit policy leading to very strong bank lending. Employment activity and housing price data in the US appears to be stabilising, albeit at historically depressed levels.
Australian GDP growth rose 0.6% in the second quarter of 2009, driven by household spending which benefited from government handouts. Economic indicators there have generally remained robust. However, there are some signs of softening in retail sales as the benefits of the stimulus measures fade. Business surveys in Australia remain strong pointing to continued growth.
NEW ZEALAND ECONOMY
Economic conditions remain weak in New Zealand with second quarter GDP growth only slightly positive. Domestic demand remains subdued with lower interest rates and lower tax rates currently being saved and not spent. There have been some positive signs with house prices rising supported by positive net migration numbers. Business confidence and prices for our exports have also been increasing led by NZ dairy prices. Unemployment is increasing but generally remains under control.
SHAREMARKETS
The New Zealand sharemarket rose strongly over the quarter following rises in markets globally and a stabilisation in economic conditions. Earnings news generally remains mixed with many companies giving little guidance or confidence in the future.
The Australian market also rebounded strongly during the quarter with earnings results generally being very good with a number of positive surprises.
Global equity markets rebounded strongly over the quarter, with commodity related sectors and emerging markets performing strongly. The US earnings season was generally better than expected boosted by company cost cutting. Gains in international markets have been reduced due to a rise in the value of the $NZ.
FIXED INTEREST
New Zealand bond returns have been subdued as interest rates remain stable. Long-term interest rates remain high relative to short-term rates. Global bonds have outperformed New Zealand bonds with credit markets stabilising and corporate bond rate levels contracting.
CURRENCY
The kiwi dollar strengthened during the quarter following general weakness in the $US, improved risk appetite and strengthening commodity prices. The New Zealand dollar has been one of the strongest currencies in the world since the start of March.
ECONOMIC OUTLOOK
Policy measures have been successful in helping improve confidence and stabilise economic growth. However, the ability of governments to maintain large levels of fiscal stimulus given their own deteriorating balance sheets is reduced. Additionally, monetary policy has little room to move further.
Whilst growth has stabilised high levels of consumer leverage and reduced economic stimulus will mean any recovery is expected to be subdued.
Emerging market countries will be crucial for future global growth and we are monitoring China closely.
New Zealand economic growth is supported by continued low interest rates, rising house prices and strong growth from Asia, increasing demand for our exports. However, growth is likely to be constrained by a still uncertain economic environment and high levels of consumer debt.
The sharp rise in the value of the $NZ will not help exporters, particularly as many commodity prices have not risen accordingly. Our base case is for low growth over 2009 / 2010. While risks for growth are evenly balanced downside risks remain given the possibility of rising unemployment and New Zealanders’ high level of debt relative to incomes.
MARKET OUTLOOK
Following the sharp rally in sharemarkets equity valuations no longer look cheap. Further market gains are more difficult and will require earnings growth. However, earnings growth is likely to be constrained by the economic environment.
The relative attraction of equities to bonds looks reasonable given decreases and contractions in corporate bond rates. A key factor in the future market equity market performance is how stimulatory policies are removed from the system. High cash positions are likely to see markets supported in the short-term.
New Zealand inflation levels are likely to remain low meaning the RBNZ can keep rates low for some time. Corporate interest rates have contracted sharply and are close to fair value and are likely to stabilise at current levels.
There is a small risk of a strong rebound in inflation. This is being reflected in yield curves which remain relatively steep in most countries.
In the short-term the $NZ remains a hostage to speculators and whilst market momentum and strong growth in the region remains it is likely to be supported. However, speculative positioning in the $NZ remains high and any change in sentiment could see a sharp retracement in the value of the $NZ.
On a medium-term basis the prospects for the $NZ are neutral with a large current account deficit offsetting positive growth characteristics of the region which should support commodity price.
