ECONOMIC & MARKET COMMENTARY
The recent tremors in global markets – as a result of Europe’s sovereign debt woes – come at an unfortunate time for New Zealand.
Economic commentary
All the ducks appear to be in a row for the domestic economy: activity has picked up and is ready to accelerate, with a more balanced mix of growth focused around the goods-producing sectors.
But there is a non-trivial risk that the European situation, if mishandled by the authorities, could lead to renewed difficulties in accessing credit.
This is a particular risk for a nation like New Zealand, which relies heavily on overseas financing. Europe aside, external conditions continue to work in New Zealand’s favour.
Commodity prices have pushed on to new record highs, and export penetration into the fast-growing Asian markets (excluding Japan) is steadily increasing.
We estimate that export volumes – which saw only a modest turndown as a result of the GFC – increased by nearly 10% in the year to March, and that growth has been broad-based.
Dairy has been the star performer to date, exemplified by Fonterra’s initial payout forecast for the 2010/11 season of $6.90-7.10/kg of milksolids.
This is 50c higher than for the latest season, and even on this initial estimate would be the second highest payout on record, following the $7.90/kg payout in 2008.
Fonterra also noted that if world prices and the exchange rate hold around current levels for most of the season (a big ‘if’), the final payout could be well above $8.00/kg. As for volume growth, drought conditions are now easing, though in some cases replaced by heavy rain.
This does not make for ideal growing conditions for the early part of the season, but the risks have diminished.
Business confidence, one of the most reliable short-term indicators of growth, remains on the up-and-up.
Own-activity expectations are at their highest in 11 years, and employment and investment intentions are now at above-average levels.
These readings are consistent with quarterly GDP growth accelerating into the range of 1% or more. Indeed, the recovery is now so well-established that even the labour market has convincingly turned the corner, with the unemployment rate falling from 7.1% in December 2009 to 6.0% in March 2010.
Against this backdrop, on June 10 the RBNZ took the widely anticipated step of beginning to remove some of the substantial monetary policy stimulus currently in place.
The Official Cash Rate (OCR) was lifted by 0.25% to 2.75% and in the accompanying statement, the RBNZ made it clear that this should be seen as the first step in an extended series of rate hikes.
The RBNZ’s projection for 90-day interest rates implied that the cash rate will rise to 5.5-6.0% over the next few years.
That’s not quite consistent with a 0.25% lift at every review date for the next couple of years – but it’s not far off.
Market Commentary
International Shares World sharemarkets, as measured by the MSCI World Index in US dollar terms, gained 3.4% for the quarter ending 31 March 2010 and a strong 53.2% for the 12 months to 31 March 2010.
In comparison returns in New Zealand dollar terms were 5.7% and 22.7% respectively.
Despite reacting to ongoing concerns over indebted nations such as Greece, Portugal and Spain during January, sharemarkets around the world continued to track higher during February and March.
Reversing a recent trend, the emerging markets (for example China, Brazil, and India) underperformed developed country share markets during the quarter ending 31 March 2010.
Company earnings results continued to surprise analysts and provide support for share market returns.
One example includes software giant Microsoft which announced record revenue for the quarter ending December 2009, exceeding market expectations by 25%.
New Zealand and Australian Shares The volatility in international share markets during January and February flowed through to the New Zealand and Australian share markets with the NZX50 index delivering a relatively flat return of 1.2% for the three months to 31 March 2010.
This followed three consecutive quarters of strong gains. For the 12 months to 31 March 2010, the local share market gained 26%.
Cyclical companies whose earnings are more exposed to the economic cycle (for example Freightways, Pumpkin Patch and Fletcher Building) have benefited from a recovery in retail spending and consumer confidence and tended to outperform the market.
The Australian share market (S&P/ASX300 Accumulation Index) continued to outperform the New Zealand share market, posting a return of 1.5% in local currency terms for the three months to 31 March 2010, while it returned a strong 44% for the year.
Listed Property Sentiment towards New Zealand listed property companies was dampened by uncertainty surrounding the upcoming Budget in May, which may negatively impact on tax laws for landlords and property owners.
The NZX Property Gross Index declined by 2.6% over the period, but was still up 16.6% for the 12 months to March 2010.
International Fixed Interest & Cash While short term interest rates around the world have stayed stable, longer dated rates increased slightly in expectation that central banks around the world will hike official interest rates in the coming months.
If you would like to know more about how Westpac can help you make the most of your savings and investment opportunities, please contact:
Peter Reilly
Investment Adviser
09 262 4018 or peter_reilly@westpac.co.nz
