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Q2 2017 Market Update


Growth assets have performed strongly year to date, mainly thanks to increasing evidence of fast global growth and more recently a positive ending to the French election. Income assets such as bonds, have lagged behind due to the ever-present pressure of potential increases in interest rates. The global economy appears to be in good shape which will provide ongoing support for growth assets but with valuations this high markets may be vulnerable to setbacks. Locally, the economy continues to perform well with no change in sight for 2018. Post 2018 there will need to be evidence that this economic performance can be maintained when the construction boom begins to slow. 

Interest Rates
There has been little news on the interest rate front with little movement in short and long-term interest rates. The Reserve Bank of New Zealand (RBNZ) seems to be pleased with current inflation figures sitting in the middle of the target range at 2.2%, as they maintained the OCR at 1.75% at their announcement in May. This came as a surprise to many that were expecting an increase, especially due to higher than expected inflation figures for the first quarter of the year. The RBNZ reiterated its desire to stick to their current plan of not increasing the OCR before late 2019. This provides no immediate relief for short-term savers but on the flip side borrowers will continue to appreciate low short-term rates for the near future. With US long term rates likely set to rise, we can expect a similar trend locally, this could spell capital losses for bond investors but offer up some more attractive bond/deposit offerings to investors seeking longer term investments. 

Consensus is that the NZ dollar will not experience much change going forward. The RBNZ appears happy with the depreciation of the NZD and surely won’t want to do anything to reverse it. The widely accepted neutral stance on the NZD is due to equal pressures being expected on both sides. A strong local economy in conjunction with current dairy prices will support the dollar but a stagnant interest rate outlook will not. Local investors holding international assets are best to expect little or no exchange impact but a small potential gain is to be had if the NZD depreciates further.

Listed property assets such as Westfield, broadly under-performed equity assets this year so far. Looking ahead the expectation of the sector hasn’t changed much, strong business performance and migration provide support but threat of rising rates remains an issue. At a recent business update it was interesting to note that the percentage of peoples’ income that goes to servicing their debt has decreased from around 12% in 2008 to around 8% now. That means there’s a bit of ‘fat’ in people’s budgets to deal with interest rate increases which the RBNZ is in no hurry to implement given their current plan of 2019. We are experiencing slower volume in the property market but not necessarily a big dip in prices.

Equities have performed well so far this year and the New Zealand market has been no different with the S&P/NZX50 index returning 6.1% to date, 7.7% including dividends. The Australian market has performed similarly however not as strongly, mainly due to lower commodity prices and below average economic growth. In response to a recent survey local businesses are expecting increased profits and confidence is higher than usual. The local equity market appears expensive in isolation but looks fair relative to global equities. Forecasters out of the US are expecting improving economy growth and a 15% chance of a recession, 5% less than last year.

Overall, not much has changed the outlook for financial markets this quarter. Flat interest rates, a strong local economy and relatively expensive equity valuations remain the main themes. A well-diversified portfolio in line with your risk profile remains important and remembering that time in the market is more important than timing the market.

Morgan Smith | Senior Paraplanner and Investment 

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