ANZ Borrowers Strategy - 23 August 2011

NZPA

Tuesday 23rd August 2011

ECONOMIC OUTLOOK
Global developments continue to take precedence over local considerations. While we've been surprised by the intensity of market movements in some instances, the developments fit within the key theme of our economic prognosis: healing in the post-GFC world will be a long, drawn-out process. Recent global data has been weak (not dire), but the next month or so will be critical. The European situation remains troubling with markets seeking a circuit breaker. By contrast, the local dataflow has shown resilience and with the pending boost provided by the Rugby World Cup and earthquake reconstruction we expect New Zealand to remain an economic out-performer, in a solid as opposed to spectacular growth sense. Nevertheless, the New Zealand economy is not immune from global weakness, with the OCR expected to remain at low levels until the global scene stabilises.

RATE VIEW
Markets are schizophrenic and uncertainty is at an extreme at the moment. In fact, the situation is so extreme that even if one was blessed with the perfect foresight on how the macro and policy outlook might evolve, there is no guarantee that one could accurately predict how markets might react. As an example, it is not clear how markets will react to more Fed stimulus, should they deliver it. Will bond yields rise on jubilation that the economy has a fighting chance at recovery, of fall on the idea that a big buyer is about to enter the market. Much depends on other markets, and how they react. We do think markets are priced more for "Armageddon" than is warranted. By the same token, there is no obvious circuit breaker in sight. Perhaps worse still (depending on your view), the one thing markets are gunning for is quantitative easing, and not just in the US, but also in Europe and Japan too. And history tells us that QE is generally associated with lower interest rates. For our part, we see volatility as the key feature of markets in coming weeks. Although we think the local outlook demands a higher OCR, this is completely swamped by global risks.

STRATEGY
This fortnight's edition is deliberately short and to the point. The reason is this: markets are on the move, and uncertainty is high. We wouldn't normally allow market volatility dictate a strategy. However, in the current environment, when the market is trading at a premium and out of line with global peers, it is not clear to us that borrowers should be in a rush to fix. Pricing has changed since our last edition, but the market turmoil is ever-present, and our preference is to stay on floating, and take advantage of the low rates on offer. Time remains on the borrower's side.

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