The more defensive, income-oriented sectors have done especially well as investors have worried less about the valuation threat from potential bond yield rises, and have viewed less cyclical equities as a useful hedge against global growth shocks. Looking ahead, the central scenario is ongoing global growth at a modestly slower rate, though with significant potential for trade disruptions (US-China, Brexit) and for the policy errors or other accidents that can derail already mature business cycles. Cash and bond yields look likely to remain very low by historical standards. In New Zealand, the economic outlook is still positive, though the economy appears to be hitting some capacity constraints. The key issue is whether ongoing growth will translate into stronger business profits: companies' profit margins appear to be squeezed between rising costs and an inability to raise selling prices.
New Zealand Cash & Fixed Interest
There has been little change to short-term interest rates, with the 90-day bank bill rate continuing to trade around 1.9%. Long-term interest rates are a little lower, with the 10-year government bond yield now down to 2.25%. The New Zealand dollar has strengthened both in headline terms against the US dollar and in overall-trade-weighted value, and is up 1.1% in overall terms year to date.
The latest view from the RBNZ at its 13 Feb Monetary Policy Statement was that the OCR will be on hold all the way out to early 2021, and the latest futures market view is that 90-day bank bill yields will indeed stay around current levels out to the end of 2020. No joy is expected, in short, for investors hoping for improved returns from cash in the bank.
The opening months of this year have generally been kind to the more income-oriented, defensive classes of equity, and New Zealand property has been no exception. The S&P/NZX All Real Estate index has provided a capital gain (and total overall return) of 4.8%, almost exactly the same outcome as the 4.9% return from the overall sharemarket.
The A-REITs have also had a strong start to 2019, for much the same reasons. Year to date, the A-REITs have outperformed the wider equity market, with a total return of 9.7% compared to the broad market’s 7.7%.
Relief from the valuation threat of higher bond yields and increased demand from investors for defensive assets also did wonders for global property. Year to date, the FTSE EPRA/NAREIT Global index is up 10.6% in terms of net return in US dollars, which was even better than the 9.9% net return from the MSCI World index.
Infrastructure may not continue to match its recent level pegging with the broader equity markets, but is looking a better option than in 2017 and most of 2018, with the bonus it may again offer a relatively safe refuge if any of the larger risks to the global economy materialise.
Global equity markets have picked up from their late 2018 sell-off, and the global improvement has rubbed off on local shares which have shared in the generally more positive environment. Given that New Zealand shares had been relatively resilient in 2018, however, there has been less local reason for a strong bounce back, and the S&P/NZX50 index is up by a relatively modest 4.9% in capital value in and in total return (dividends year to date are negligible).
Australian shares, which had been more impacted in the 2018 sell-off, have had a stronger rebound, and the S&P/ASX 200 Index is up 7.4% in capital value (7.7% including the modest dividends year to date).
The economic outlook remains reasonably positive. Business confidence has been picking up, more so on the ANZ Bank's latest surveys than in those run by the New Zealand Institute of Economic Research which said businesses were "less gloomy" rather than "more happy", but overall, businesses are more confident than they had been.
In Australia, the economy has been alternating for some time between periods of acceleration and deceleration, with no definitive move towards consistently faster growth. The most recent readings on the business outlook continue the pattern, and are pointing to a modest deceleration.
International Fixed Interest
Central banks everywhere have found themselves in the same position. They had originally planned on gradually normalising interest rates, in a world where economic growth was good and inflation was rising back to where the central banks had wanted to see it. Now, however, the outlook for global growth—while not outright poor—looks less assured, and central banks are having, at a minimum, to put their plans on hold and, if growth were to turn weaker again, having to contemplate reversing course back towards even lower rates than today's.
World share prices have been rising year to date, with the MSCI World index of developed economy shares now up 9.9% (in terms of the overseas economies' own currencies) and by 9.7% in US dollar terms. The large rise, while welcome, has not yet been quite enough to make back all the ground lost in the final quarter of 2018: in US dollar terms, the index is still 6.5% below its recent pre-sell-off peak on 21 Sept, and 8.8% below its all-time high back in January 2018.
The gains have been widely spread. In the US, the S&P500 Index is up 9.9% and the tech-heavy NASDAQ Composite index is up 12.6%. European shares, despite a weakening economic backdrop, have also done well, with the FTSE Eurofirst300 index up 9.1% in euros. Even in the otherwise Brexit-raddled UK market, the FTSE100 index is up 7.6% in British pounds. Gains were more modest in Japan, where the Nikkei is up 4.4% in Japanese yen.
Emerging markets have also seen year to date gains, though the 6.7% US dollar rise for the MSCI Emerging Markets index is quite modest set against the brutal 16.6% loss for the sector in 2018. The core BRIC markets (Brazil, Russia, India, China) are up 8.5% in US dollars. Three of the four delivered sizable gains, but the overall result was held back by the weak Indian sharemarket, where a marginal (down 0.7%) fall in rupee terms for the Sensex index was aggravated by a 2.5% decline of the rupee against the US dollar.
It would be nice to be able to say the interlinked worries that triggered the big sell-off in equities late last year had all been resolved, but sadly the outlook remains up in the air for some of the key moving parts. The outlook for the global economy, for some of its key players, and for the outcome of the various threats to world trade (US-China and Brexit, in particular) are all still in play.
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