Updated Milford Market Outlook

Milford Asset Management continues to have a very cautious outlook for the global economy and global financial markets.  While the prospect of a complete meltdown of the global financial system has diminished the global economic outlook remains poor.

The reality is that the unwinding of high consumer leverage will take time. Savings rates need to increase to offset wealth destruction from housing and financial markets.  Moreover, confidence is likely to remain weak and rising unemployment will impact negatively on economic 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 has also weakened considerably.  On the plus side, compared to the US, Europe has room to reduce interest rates as inflation falls and its equity valuations appear more reasonable.

Poor global growth should lead to lower inflation and interest rates and eventually provide a stimulus for some economies.  Falling petrol and food prices should also be a boost for consumers but problems with high debt levels, lower house values and rising unemployment are likely to dominate consumer sentiment and depress consumer spending for some time.

OECD lead indicators point to continued weak global economic growth, as evidenced by lower demand for commodities.  So our base case is for slowing global growth with risks to the downside especially if growth in China falls sharply.

The short-term economic outlook for Australia is mixed.  It has been supported by tax cuts, relatively low unemployment and strong commodity prices. However, tighter credit conditions and falling commodity prices, stock markets and house prices are starting to have a negative impact.  On balance Australian growth is likely to remain subdued in the short-term.   Over the medium-term the economy has support from the prospect of lower interest rates, future tax cuts and increased Government spending.

New Zealand faces several headwinds including wealth destruction in the housing and financial markets as well as 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 and interest rate cuts will also provide a boost to consumers.  However, these will take time to flow through and much of the gain from this is 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.

Within this economic and market environment there will be investment opportunities but we will continue to make these on a very selective basis.

         Anthony Quirk, 16 October 2008