By Anthony Quirk
Friday 3rd June 2005
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Let's look at each of these in turn.
1) The New Zealand Economic and Sharemarket Outlook
After what has been a great run it is now hard to be bullish on either the New Zealand economy or sharemarket. The following factors are starting to weigh on both: the high Kiwi dollar, low net migration levels, high oil prices, falling consumer confidence, falling business confidence, a high current account deficit and an easing residential building sector.
Perhaps the most important factor in the outlook is that we seem to have a (currently) hawkish central banker in charge! The Governor of the Reserve Bank in New Zealand (RBNZ), Alan Bollard recently pronounced that he still holds some inflation fears and that a further rise in interest rates is possible.
Frankly, this is a bit hard to fathom in the face of the negative factors listed above. Sure, unemployment is low but this is a lagging not a leading indicator of how an economy is going to perform over the next 6-12 months. That is, the current unemployment rate is not a good predictor for the economy.
Ironically what the RBNZ does with interest rates (and the impact on the yield curve) is actually a much better predictor of the economy. That is, the New Zealand economy slows down when short-term interest rates are higher than long-term bond rates – a so called negative (or inverse) yield curve. This is because short term rates are the basis for floating mortgage rates and also potentially ratchet up the middle part of the yield curve, which is used to set many fixed rate mortgages and corporate borrowing rates.
With a negative yield gap having been in place for some time now the clear implication is that economic growth is going to slow down. This is clearly starting to happen but we would be stunned if the RBNZ did raise rates next week as it certainly has the potential to result in an economic "hard landing" and even a full blown recession.
If this does occur then corporate earnings have the potential to be significantly "crunched". A trickle of companies are already making noises about a poorer earnings outlook but this could become a flood if a hard landing does eventuate.
Generally, sharebroking analysts under estimate the impacts of an economic slow down on corporate profits. They often forecast steady profit increases for most companies through their forecast period, whatever the macro economic environment. Thus, the New Zealand sharemarket does appear vulnerable to earnings shocks at present. The key for successful investing over the next six months may be to avoid the earnings "land mines" that are out there.
Looking longer-term there will be a time to look at companies that will do well from a falling interest rate environment (and lower currency) as well as yield plays. However, it is probably premature to look at this now – unless we do get another rate rise from the RBNZ and an economic "crunch" through the second half of this year.
2) The Budget – some implications for savings, investment product vehicles and the industry
While most New Zealanders found the 2005 Budget to be a total bore, other than the resultant debate about tax cuts, the savings industry was hanging on every word of the Finance Minister. It is certainly the most significant Budget for savings policy in the twenty-plus years I have been involved in the industry with many significant ramifications. The most obvious are:
All in all, a very proactive budget in terms of savings policy by this Government but one that will mean some winners and losers amongst the industry. However, more importantly the consumer should benefit from having the choice of investing in much more efficient managed fund vehicles, from a tax and fee perspective.
To see how the numbers stacked up for various markets around the world in the past month and over the year, visit ourMonthly Market Review here
Anthony Quirk is the managing director of Tyndall Investment Management New Zealand Limited (Tyndall).
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