The Blog

April Market Commentary

Contents Government Bonds Central Banks US Share Market Rally Australian Property Update NZ Property Market Update A world of new lows Market indicators are now suggesting that the world is slowing faster than most Central Banks had expected, and the chance of interest rates moving higher in 2019 has reduced from approximately 50/50 to now be almost zero percent. As suggested in previous commentary the European Central Bank, US Federal Reserve and other central banks in the developed world have signalled they wish to continue to support lower interest rates for longer and this has led to the inversion of several “yield curves”, including New Zealand’s. It has also led to the German 10-year government bond moving back into negative territory for the first time since July 2017. New Zealand’s 10-year bond rate has also moved to the record low of 1.74% gross p.a. Both local and global central banks have reversed their tightening biases with: The US Fed removing the likelihood of any cash rate rises in 2019 and stopping their quantitative tightening programme sooner than expected; The ECB […]

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December Market Commentary

China/US trade war – He said, Xi said Coming into the US mid-term elections (where the Republicans lost control of House of Representatives to the Democrats) President Trump’s rhetoric was strongly anti-China. Post the mid-terms his tone has become more accommodative to China. The G20 has produced 90-days of breathing room in the all-important trade war between China and the US. President Trump met with President Xi Jinping, where they apparently discussed 142 different structural items, including the removal of forced joint ventures and loss of intellectual property for US companies expanding into China. Unsurprisingly, President Trump has stated “It’s an incredible deal, and if it happens it will go down as one of the largest deals ever made”. Not to steal from the President’s comment, but as we progress past this meeting it will be interesting to see if anything actually changes. President Trump left the meeting with an understanding that China will be reducing and removing the 40% tariff they had placed on American made cars. Interestingly, as at 4 December, President Xi has yet to confirm this, […]

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October Market Commentary

New Zealand share market – how high is too high? We continue to watch in wonder as the New Zealand share market pushes to new highs. Since the start of the year the NZX50 is up almost 10% and a very impressive 11.70% per annum over the past 10 years to 30 September. Some of this staggering growth has come from increased corporate earnings, but most of the gains have come from an expansion in the multiple of the Price to Earnings (P/E) ratio which has grown from a low of 13.3x in 2012 to a record high 26.6x today, according to FNZC. This growth has been mainly driven by offshore investors who today currently own just under 50% of the total market, so the concern is what will happen to prices if the foreign investors leave the New Zealand market for some reason. New Zealand economy slowing We have had an incredibly positive decade of growth in New Zealand, on the back of strong demand from offshore for local assets and globally falling interest rates. This has led to […]

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September Market Update

PWA September Market Commentary NZ economy slowing We have had an incredibly positive decade of growth in New Zealand, on the back of strong demand from offshore for local assets, and globally falling interest rates. This has led to strong business growth/confidence and a reducing unemployment rate, as well as an ever more expensive New Zealand share market. Data released in the last week of August showed that business confidence in New Zealand has dropped from a high of over 60% positive in 2014 to 40% negative today. The last time business confidence was at such low levels was back in 2008-2009, during the Global Financial Crisis (GFC). This negative view on growth is also apparent in the slowing NZ Gross Domestic Product (GDP) which has slowed from a growth rate of just under 5% per annum in late-2014 to just over 2% today. The Reserve Bank of New Zealand (RBNZ) is forecasting growth accelerating into the end of 2018, but there is more data coming in to support a further slowing in growth and local markets are now pricing […]

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July Market Update

Is this as good as it gets? The US share market had a challenging June with the S&P falling 3% from its mid-month high before starting a slow recovery. As at 9 July 2018 the S&P500 was still 4.10% below the high reached at the end of January 2018. The US economy has just completed an outstanding second quarter with annualised GDP growth now at 3.40%. The last quarter also saw record high increases in corporate earnings of c.25% y.o.y, but is this sustainable? This outstanding growth in earnings has come on the back of record low interest rates, and tax cuts, both of which are now in the past. The Citigroup Economic Surprise Index for the US, which tracks how data is stacking up against analyst forecasts, turned negative at the end of June 2018 for the first time since September 2017 following a string of weaker than expected US economic data. We are now seeing S&P500 earnings per share forecasted to fall over the next five quarters. We also anticipate that the increasing risk of trade wars will […]

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June Market Update

PWA June Market Commentary The next Eurozone crisis may be building – “Quitaly” One of the outcomes of the Quantitative Easing (QE) that has occurred since the 2008 Global Financial Crisis (GFC) is that anyone with investments has seen their wealth grow, while those without investments have struggled. This has led to the gap between the “haves” and the “have nots” increasing substantially. In the democratic world, where the majority can vote for change, the widening gap has led to a rise in power for the “populist parties”. The most recent example of this is in Italy where the Five Star Movement and Lega parties have formed a coalition and are now sworn in as the new Italian government. Both these parties have come to power on the back of campaign promises to address Italy’s debt levels and the perceived Eurozone imbalance that the country suffers from. Both parties are also seen as “Euro-sceptics”. The coalition did not get off to a good start with their first choice for new Finance Minister, Paolo Savona, being vetoed by the Italian President […]

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May Market Update

3% US 10-Year Government Bonds – for one day As inflationary pressures continue to increase in America, we have seen bond markets continuing to price in a higher expectation of rate rises soon from the US Federal Reserve. Rising inflation, and the unwinding of US quantitative easing (QE), led the US 10-year government bond yield to move above 3% for the first time since December 2013. It stayed at this level for only one day, but this breach of what had previously been the upper bound of yields caused the market to finally take notice of the real risk of interest rates moving higher. The recent climb in the US bond rates means that US-based bond holders are finally getting a positive “real” return (the return after allowing for inflation) from holding these bonds. As shown in the chart above, since late 2016 Germany, the UK and Japan have been providing local investors negative real returns on their government debt. Yields in these countries have also started moving closer to a positive real return, however still lag rates in the […]

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April Market Update

Markets driven lower by tech scandal & trade wars In the quarter ending March 2018, we have seen further volatility and uncertainty in the markets. All developed markets have produced a negative return, while the emerging markets have managed to maintain a small positive return. The S&P500 had the worst first quarter performance since 1929 according to Bloomberg, bringing the S&P500 Price to Earnings ratio back to 16.5 times. A level not seen since early 2016. Over the last year, ending March 18, market indices have been positive. The lowest annual performance came from the UK (0.22%) and Europe (2.17%). The best performance over the past 12 months has come from the Emerging Markets (22.44%), followed the Dow Jones Industrial Index (19.39%). VIX index remains high Volatility remains high across all global markets, with the US leading the other markets for the first time since 2008. This indicates a high level of uncertainty in investors at present. This negatively impacts share prices as investors demand a higher potential return to justify the increased risk. This uncertainty has come from multiple […]

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