The New Zealand economy faces at least short-term growth challenges as businesses face higher costs...

The world economy is still growing, which is a generally positive background for risk assets, but investment outcomes have become overdependent on ongoing gains from U.S. equities. The most likely outlook is ongoing global expansion, though trade wars, monetary policy mistakes, problems in some emerging markets, and geopolitical shocks are all real risks to monitor. Bond yields in the U.S. have headed higher and have contributed to weak performance by global fixed interest and by global income-oriented assets like property and infrastructure; Australasian property markets, however, have been performing rather better. The New Zealand economy faces at least short-term growth challenges as businesses face higher costs, though the most recent consensus forecasts suggest the economy can still grow at reasonable rates over the next three years.

New Zealand Cash & Fixed Interest

The Reserve Bank of New Zealand continue to hold the official cash rate (OCR) at 1.75%, and other short-term interest rates are correspondingly steady, with the 90-day bank bill rate at a little under 2.0% (1.94% currently).

Local bond yields have improved slightly with the U.S Bond yields being the main driver. The 10-year government-bond yield is now at 2.6%.

The New Zealand dollar has depreciated. Likely reasons include the RBNZ’s dovish call on interest rates in August, concern that the economy may grow more slowly, and the global strength of the U.S. dollar (up 4.1% in overall value since the start of this year). For the year to date, the kiwi dollar is down 4.1% in overall value and in particular down 8.3% against the strengthening U.S. dollar. In terms of the headline USD rate, it has dropped to 65.1 U.S. cents from 71 cents.

Forecasters have by and large bought into the RBNZ’s August assessment that any interest-rate increases are further away than before. They have not gone so far as to embrace the RBNZ’s hint that there might even be an interest-rate cut, but they have pushed out the timing for a hike to September 2019 at the earliest (the Bank of New Zealand’s view), while other forecasters favour somewhere in the first half of 2020. The financial futures market is also picking a first increase for around mid-2020. Low rates on bank deposits will remain a fixture for some time yet.


The listed property sector has been in steady recovery mode since May. The net result is that the sector has had a reasonable year to date, with the S&P / NZX All Real Estate Index up 3.1% in capital value and up 6.2% in total return. While there is some risk that the economy is heading for a near-term period of slower growth, the NZIER consensus forecasts are still pointing to gross domestic product growth of some 3% a year over the next three years, and operating conditions should remain reasonably supportive for property performance.

The A-REITs have also benefited from a winding-back of expectations about the likely rise in bond yields. For the year to date, the S&P/ASX200 A-REITs Index is up 3.7% in capital value and has delivered a total return including dividends of 7.0%, narrowly outperforming the wider share market.

Global property has not fared quite so well, and for the year to date, the FTSE EPRA/NAREIT Global Index is showing a small 0.7% loss in terms of net return in U.S. dollars.

Australasian Equities

The New Zealand market has been somewhat volatile in recent weeks–there was a 3.5% sell-off between late August and 10 September before picking up again–but it still has good year-to-date numbers to put in the window. The S&P / NZX50 Index is up 7.1% in capital value and has provided a total return including dividends of 9.5%.

Australian shares are also ahead for the year, with the S&P/ASX 200 Index showing a small capital gain of 1.8% and a total return of 5.2%.

International Fixed Interest

In the U.S. the key 10-year Treasury bond yield has risen in recent weeks. There was a brief period in later August when investor worries, over Turkey in particular and emerging-markets risk more generally, had spurred the buying of Treasuries as a safe-haven asset, and yields had fallen, with the 10-year yield dropping to close to 2.8%. More recently, however, yields have moved back up again, and the 10-year yield is now a whisker below 3.0% (2.97%).

The outlook for international fixed interest essentially splits into the U.S. market and everywhere else. In the U.S., the most likely scenario is that interest rates will head higher whilst elsewhere the other major central banks are unlikely to make any significant near-term changes to monetary policy.

The outlook for this asset class continues to remain problematic.

International Equities

World shares have made a small gain for the year to date. The MSCI World Index is up 3.4% in terms of its various local component currencies and up 2.3% in U.S. dollars (3.8% including taxed dividends). The outcome continues to rely on the U.S. performing strongly: The MSCI World index ex the U.S. has actually recorded a year-to-date capital loss of 6.2%.

Other major markets have largely been missing in action. Apart from a tiny 0.4% rise in the French market, the other major bourses are down for the year in their own currency terms, ranging from a marginal loss for the Japanese market (negative 0.7%) to larger losses in Europe (U.K. negative 4.9%, Germany negative 6.9%).

The other drag on overall asset-class performance has been the emerging markets. The MSCI Emerging Markets Index in U.S. dollars is down 13.3% for the year to date: Within the overall outcome the key BRIC economies (Brazil, Russia, India, China) are down 14.5%. The two countries that have done most in recent months to alarm investors about emerging markets risk have done especially badly, with the MSCI Turkey index down 53.3% and the MSCI Argentina down 53.8% (both in U.S. dollars).

The outlook for global shares continues to hang on the same handful of factors as previously: the performance of the U.S. economy, the wider performance of the global economy, the potential impact of trade wars, the tension between expensive share valuations (particularly in the U.S.) and rising bond yields, and the lurking risks of geopolitical issues.

Full MorningStar Economic update.


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