Market Update

For the quarter ended June 2017

No boom, no bust

Discomfort with asset prices and the inability of President Trump to implement policy change has translated to increased calls for an imminent financial market correction. The economic cycle however remains robust and many of the geopolitical risks expected earlier this year have not eventuated.

The length of the current expansion has also been highlighted as an indication that a correction is overdue. However, expansion duration has never been the reason for the end. Accordingly with none of the signals of a recession appearing imminent (inflation risks, macro-economic imbalances or external shocks) a “no boom, no bust” outcome remains the most likely outcome.

The current consolidation phase (with growth in the first half of 2017 slower than anticipated) is expected to strengthen, with the US economy poised to accelerate in the second half of the year. China’s slowdown is seen as controllable and Europe is continuing to improve.

This is clearly shown by the positive forecast revisions for Gross Domestic Product (GDP) growth in Advanced Economies.

Figure 1. Positive GDP revisions (Advanced Economies)

Figure1 050717

Source: Forsyth Barr analysis, International Monetary Fund

 

Some uncertainty but no Black Swans

At the start of the year we could have pointed to the heightened political risks in Europe, risks arising from the United Kingdom exiting the European Union, credit issues in China and any number of other geopolitical risks. Well, the European elections went off without a hitch and the main issue has been the United Kingdom. The snap election undertaken by the May government was supposed to deliver greater stability, however the outcome has been more reliance on other parties and the opposite of what had been hoped.

The other major variance from expectations has been President Trump and his inability to deliver on almost anything. The result is that the fiscal stimulus built into interest rate forecasts and inflation targets has been pared back. However, the United States economy was improving prior to these promised measures and even without this stimulus, growth continues to improve.

 

Equity markets focused on valuation

The equity markets we follow all delivered positive local currency returns over the last three months. However, the strengthening New Zealand Dollar (NZD), buoyed by positive Terms of Trade and still robust economic growth, offset many of these gains. 

European markets led international market returns, benefiting from the improving outlook and from political risks abating. US equity returns were strong in local currency terms, with nine of the 11 sectors advancing; just Energy and Telecommunications declining. This was despite the political issues surrounding President Trump and reinforces the underlying growth in the US economy. It also suggests business is getting on with business, rather than focusing on political noise.

Australian returns were impacted by declines amongst telecommunications companies, the Australian Budget introducing another levy on the largest five banks and by weaker oil prices impacting the Energy sector. A number of Consumer Discretionary companies were also downgraded, as the impact of the entry of Amazon into the Australian market weighed on sentiment.

Domestically, New Zealand equities produced solid positive returns. Defensive sectors benefited from declining interest rates. Building company downgrades acted as a brake on returns, with higher building costs and tighter lending criteria pressuring margins and expected activity levels.

Figure 2. NZD detracts from equity returns in most markets.

Figure2 050717

 

Source: Forsyth Barr analysis, Bloomberg

Reserve Bank of New Zealand on hold, long-term interest rates to follow global trend

Long-term interest rates fell during the quarter as financial markets discounted the degree of stimulus that would occur in the United States. The United States Federal Reserve however has maintained its tightening of monetary policy plan, believing the slower than expected growth in the first six months of 2017 to be transitory.

Higher long-term interest rates are still expected, driven by global economic strength and a gradual pull-back from quantitative easing measures in Europe later this year. The United States Federal Reserve is also expected to begin reducing its balance sheet. However the speed and quantum of the rise is likely to have moderated, given weaker inflation expectations.

New Zealand interest rates should follow global trends, although the Reserve Bank of New Zealand is expected to maintain the Official Cash Rate steady at 1.75% until well into 2018.

 

Market Statistics

MarketStats 050717 Revised

Source: IRESS

* 25 bp (basis points) is equivalent to 0.25%

 

Not personalised financial advice: The recommendations and opinions in this article do not take into account your personal financial situation or investment goals. The financial products referred to in this article may not be suitable for you. If you wish to receive personalised financial advice, please contact your Forsyth Barr Investment Advisor. The value of financial products may go up and down and investors may not get back the full (or any) amount invested. Past performance is not necessarily indicative of future performance. Disclosure statements for Forsyth Barr Investment Advisors are available on request and free of charge. Disclosure: Forsyth Barr Limited and its related companies (and their respective directors, officers, agents and employees) (“Forsyth Barr”) may have long or short positions or otherwise have interests in the financial products referred to in this article, and may be directors or officers of, and/or provide (or be intending to provide) investment banking or other services to, the issuer of those financial products (and may receive fees for so acting). Forsyth Barr is not a registered bank within the meaning of the Reserve Bank of New Zealand Act 1989. Forsyth Barr may buy or sell financial products as principal or agent, and in doing so may undertake transactions that are not consistent with any recommendations contained in this article. Forsyth Barr confirms no inducement has been accepted from the researched entity, whether pecuniary or otherwise, in connection with making any recommendation contained in this article. Analyst Disclosure Statement: In preparing this article the analyst(s) may or may not have a threshold interest in the financial products referred to in this article. For these purposes a threshold interest is defined as being a holder of more than $50,000 in value or 1% of the financial products on issue, whichever is the lesser. In preparing this article, non-financial assistance (for example, access to staff or information) may have been provided by the entity being researched. Disclaimer: This article has been prepared in good faith based on information obtained from sources believed to be reliable and accurate. However, that information has not been independently verified or investigated by Forsyth Barr. Forsyth Barr does not make any representation or warranty (express or implied) that the information in this article is accurate or complete, and, to the maximum extent permitted by law, excludes and disclaims any liability (including in negligence) for any loss which may be incurred by any person acting or relying upon any information, analysis, opinion or recommendation in this article. Forsyth Barr does not undertake to keep current this article; any opinions or recommendations may change without notice. Any analyses or valuations will typically be based on numerous assumptions; different assumptions may yield materially different results. Nothing in this article should be construed as a solicitation to buy or sell any financial product, or to engage in or refrain from doing so, or to engage in any other transaction. Other Forsyth Barr business units may hold views different from those in this article; any such views will generally not be brought to your attention. This article is not intended to be distributed or made available to any person in any jurisdiction where doing so would constitute a breach of any applicable laws or regulations or would subject Forsyth Barr to any registration or licensing requirement within such jurisdiction. Terms of use: Copyright Forsyth Barr Limited. You may not redistribute, copy, revise, amend, create a derivative work from, extract data from, or otherwise commercially exploit this article in any way. By accessing this article via an electronic platform, you agree that the platform provider may provide Forsyth Barr with information on your readership of the articles available through that platform.