NZ shares probably cleared for take-off

Monday 4th November 2019

If history is any guide, global sharemarkets should cruise through Christmas to a strong finish for the year.

Mark Lister, head of wealth research at Craigs Investment Partners, says since 1950, November has been the strongest month of the year for the US share market, averaging a return of 1.6 percent and experiencing gains 68 percent of the time.

“December isn't far behind as the third best performing month, increasing on 74 percent of occasions for an average gain of 1.5 percent,” Lister says.

If the US stock market goes to form, all other things being equal, the New Zealand share market should follow suit.

Returns year-to-date are impressive: the S&P 500 Index, the broad measure of the US share market, has gained 22.3 percent, although it started the year at a low point after an aggressive sell-off late last year.

The S&P/NZX 50 Index includes dividends, something the US index and most international indices don't. It has risen 22.1 percent but that isn't directly comparable with other indices for that reason.

Nevertheless, “markets are entering a traditionally buoyant period on a sound footing," Lister says.

Sentiment has turned about 180 degrees and is now far more optimistic.

“Only a month ago, we were worrying about inverted yield curves, a looming recession, zero interest rates – everything was going to be terrible,” he says.

“It was all glass-half-empty but now people are taking the glass-half-full view - justified or not.”

In particular, the latest readings of economic activity in the US have been positive, particularly Friday's jobs numbers, which were much better than expected.

The market had expected 75,000 non-farm jobs were added in October but the actual number came in at 128,000. A strike at General Motors, which has since been settled, affected the October numbers, but not as much as expected.

Lister says an additional feel-good factor was that the job gains for August and September were revised materially higher.

“The unemployment rate increased slightly to 3.6 percent from 3.5 percent, but it is still almost the lowest in 50 years.”

The latest US company reporting season is also going well – with 72 percent of S&P 500 companies having reported, 60 percent have exceeded revenue estimates and 79 percent have beaten profit forecasts.

Adding to the sea change in sentiment, while the Federal Reserve did cut its Fed Funds Rate by 25 basis points to 1.5-1.75 percent last week, it also indicated that it would need to see a “significant rise” in inflation before it cut rates again.

That takes some of the pressure off the Reserve Bank of New Zealand and other central banks around the world to continue cutting its official cash rate from its current 1 percent level.

Indeed, the market is currently pricing in only a 50 percent chance of an OCR cut at the next review on Nov. 13.

“It wasn't long ago when it was a done deal” that the RBNZ would cut the OCR to 0.75 percent at the next meeting of its monetary policy committee, Lister says.

While it's still possible RBNZ could cut the OCR, domestic growth appears reasonable, the housing market is showing signs of life and global sentiment has improved.

Fonterra has also raised the farm gate milk price “to levels we haven't seen for a good six years or so,” Lister says.

Fonterra is now expecting to pay its farmer-suppliers and shareholders $6.55-7.55 per kilo of milk solids, a 30 cent increase, for the 2019/20 season – the midpoint of $7.05 would be the highest since the 2013/14 season.

“There's plenty of reasons for the RBNZ to sit tight and keep their powder dry” on Nov. 13, should it so choose.

The RBNZ will have the results of the latest GlobalDairyTrade auction due Wednesday to add to the mix. The last auction saw prices rise 0.5 percent, the third consecutive increase.

“While the headline index is still 6.5 percent down from the May 2019 highs, it is up 15.5 percent in 2019 and is 13.3 percent higher than a year ago,” Lister says.

Another key input for RBNZ will be the September-quarter domestic jobs numbers due on Wednesday.

Economists are expecting the unemployment rate to tick up slightly to 4.1 percent from 3.9 percent in the June quarter.

Lister says the labour data are volatile and the June quarter reading was seen as over-stating the jobs market's strength.

“Unless we get an absolute shocker, where the unemployment rate spikes and jobs growth is terrible,” RBNZ is likely to take the numbers in its stride.

(BusinessDesk)

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