Looking forward, the global business cycle, while still intact, is showing some signs of slowdown...

Interest rates have fallen to ever lower levels, benefiting both bonds (through capital gains) and equities (through improved absolute and relative valuation). Most of the impetus has come from central banks trying to get inflation to the levels they would prefer, but some (including in New Zealand) has also been insurance against potential economic slowdown. Looking forward, the global business cycle, while still intact, is showing some signs of slowdown and will need a favourable outcome from the currently quiescent U.S. - China trade hostilities if it is going to roll on into 2020 or beyond. At home, there is more evidence of a slowdown in domestic growth, and local equities are looking expensive against what looks like an uphill road for local corporate profits.

New Zealand Cash & Fixed Interest

Interest rates across much of the developed world have fallen to even lower levels, and New Zealand has been no exception. At the short end, the 90-day bank yield is now just over 1.5%, down nearly 0.5% since the start of the year, and at the long end, the 10-year government bond yield is down 0.8% to under 1.6%. While there has been volatility along the way, at the moment the New Zealand dollar is not showing much net change: For the year to date, it is slightly up (0.9%) in overall trade-weighted value, and at its current USD 67.9 cents is also up a little (1.1%) against the U.S. dollar.

Forecasters, and futures market pricing, both point to further cuts in interest rates from the Reserve Bank of New Zealand, with another 0.25% cut seen as the most likely outcome, although some forecasts (such as the ANZ Bank) think there could be a further 0.25% cut beyond that. Returns from cash in the bank look set to go even lower.

Property & Infrastructure

Listed New Zealand property has done very well, outperforming a share market that was itself in impressive shape. For the year to date, the S&P / NZX All Real Estate Index is showing a capital gain of 21.9% and a total return including dividends of 24.5% (25.1% including imputation credits). The total return was 2.5% better than the wider share market’s 22.0%.

The A-REITs have also done well, and as in New Zealand, have outperformed the overall share market. The S&P / ASX 200 A-REITs Index has delivered a year-to-date capital gain of 20.6% and a total return of 23.5%, 2.3% more than the return from holding the S&P / ASX 200.

Overseas listed property has not quite managed to keep pace with the MSCI World Index but has been no slouch, either. The FTSE EPRA / NAREIT Global Index has had a net return (including taxed dividends) of 16.0% in U.S. dollars, a bit behind the 17.9% net return from the MSCI World Index. Asia (net return of 17.7%) and North America (16.3%) were the strongest markets, with emerging markets (6.1%) and the eurozone (7.4%) at the back of the pack.

In a climate that has been generally congenial to income-oriented equities, global listed infrastructure has also done well. For the year to date, the S&P Global Infrastructure Index in U.S. dollars has returned 19.8% including the value of taxed dividends, a modest outperformance compared with the MSCI World’s 17.9%. The return was the same when hedged back into New Zealand dollars.

Australasian Equities

Although global equity markets have eased off in recent weeks, the local share market has kept going, and New Zealand shares have continued to do well. For the year to date, the S&P / NZX 50 Index is up 20.0% in capital value and has delivered a total return of 22.0% including dividends (22.6% for those who can use imputation credits).

Australian shares have more mirrored the global trend, with little net movement in July after strong rises earlier. For the year to date, the S&P / ASX200 Index is up by 18.7% in capital value and by 21.2% including dividend income. By sector, the resources (up 27.8%) and IT stocks (up 27.4%) have been the stars, while the financials (up 14.0%) have been relative laggards.

The most recent indicators continue to point to the New Zealand economy slowing down and in Australia there has been similar evidence of a cyclical slowdown.

International Fixed Interest

World bond markets have continued to confound expectations, with already very low bond yields falling even further.

International Equities

World shares have plateaued in recent weeks, but strong performance earlier in the year means that markets are still showing substantial year-to-date gains. The MSCI World Index is up 16.5% in U.S. dollars. Global equity performance has continued to be partly dependent on a strong U.S. market, where the S&P 500 is up 18.7%: Without it, the world index would have 12.3%. Eurozone shares have done surprisingly well, given the weak eurozone economy, with the FTSE Eurofirst 300 Index up 14.4%, while even the rising prospect of a ‘hard’ no-deal Brexit has failed to prevent U.K. equities from recording an 11.6% gain. The laggard among the major markets has been Japan, where the Nikkei index is up 7.3%.

Emerging-markets shares are also ahead but have not matched the developed markets: The MSCI Emerging Markets Index is up 9.5%, with the key BRIC, or Brazil, Russia, India, China, countries up 12.6%. By far, the strongest of the BRICs has been Russia, where the FTSE Russia Index in U.S. dollars is up 33.4%.

The impact of more supportive monetary policy, the global economic outlook, the U.S. corporate reporting season, and the outlook for global trade tensions will remain the key drivers of equity performance in coming months. On balance, despite the various uncertainties, the most likely outlook is for modest ongoing global growth, albeit with the preponderance of risks tilted towards the downside.

Full MorningStar Economic update.


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