The Shine Comes Off the NZ Market
The month of October 2016 will not be remembered fondly by the NZ fund manager community. To the period ending 28th October we have seen the NZX50 decline 8.4% from its high reached in 7th September. From anecdotal evidence we are hearing this correction is due to some profit taking by foreign investors, and/or a reduction in riskier investments by global managers as they prepare for the US election followed closely by the Federal Reserve’s December meeting, where markets are pricing in over a 70% chance of a rate rise.
Global Equity Indices – ending October 27th
Source: Bloomberg, ANZ Research
Further bad news has been coming from the NZ markets with both Pumpkin Patch, and Wynyard Group both placing themselves in voluntary administration after being unable to continue funding their operations.
Not just limited to shares, bonds are struggling as well
We have previously discussed our concerns at the lack of diversification between both local and global bonds, and how these two asset classes may now decline together. Once again the month of October 2016 has also not been kind to either with interest rates sneaking higher (bond prices declining).
Global 10 year bond yields – ending October 27th
Source: Bloomberg, ANZ Research
What impact does this have on bond prices?
As we have mentioned in previous reviews we have been concerned about the impact a rising interest rate might have on bond retail values. As an example of how a small move in rates over the last month has impacted bonds in New Zealand we have attached a chart showing the movement in interest rates on NZ 10 year government bonds. As the chart shows if an investor had purchased the NZ 10 year government bond in August 2016, they would receive a coupon of 2.12% gross p.a. for the next 10 years. This small move up in interest rates of 0.60% has led to the resale value of this bond reducing by over 5%.
NZ Government 10 year bond yield
So is this the turning point?
We continue to recommend caution in bond markets given our concerns of interest rates moving higher still; but we doubt anyone will be able to call the top of this bond bubble with any accuracy as we cannot factor in what the central banks might do.
As you will note in the chart above rates had increased to 3.63% in mid-December last year before falling as markets priced in the influence of greater central bank stimulus for longer… In a world where central banks are happy to push interest rates as low as possible we may just see an increase in quantitative easing, or an indication from the US Federal Reserve that they will also stay lower for longer. This could push yields back down (bond prices up).
Australian property market in trouble
For some time now there has been discussion in the markets around the headwinds facing the Australian property market with a number of commentators pointing to an oversupply of properties, specifically apartments. This view is further reinforced by the recent observation that there are now more cranes gracing the Sydney skyline than there are in the whole of North America.
Quarterly Australasian property price movement
This oversupply has placed downward pressure on property prices in some parts of Australia, with a large number of investors now failing to settle on apartments previously purchased off the plans for prices higher than current resale values. These settlement defaults are creating significant liquidity problems for a number of Australian property developers now unable to meet their own borrowing commitments, forcing banks to foreclose and liquidate their businesses.
Australian property values – ending September 2016
New Zealand property values – Oct 2016
Source: ANZ, REINZ
NZ house price to disposable income
Source: ANZ, RBNZ
Why should this matter to us?
This cycle is not limited to Australia, with New Zealand banks also tightening up their property lending activities and closely managing debt levels to reduce shareholder risk. . In this regard we have seen pressure on NZ banks from the RBNZ to increase the securities that their lending is held against, which has had a flow on effect to term deposit rates, as local banks try to attract local investors back from the higher yielding sectors of the market. This in turn will lead to banks in New Zealand and Australia raising mortgage rates in an effort to retain their profit margins.
Lastly offshore interest rates have also been increasing in anticipation of the US Federal reserve raising rates next month. This too puts pressure on local banks, who secure a large portion of their funding from offshore lenders. These pressures are likely to translate through to borrowers in the form of increasing interest rates.
What does President Trump mean to the markets?
Once again we see it is wise to expect the unexpected. We now have a President Trump, and his win in the election was convincing. As with Brexit we see the majority of voters, who are tired of living in a world where the rich get richer, have voted for Trump in the hopes of an improvement in their lives, and the lives, of their children.
One of the definite outcomes of this election is that comedians will have no shortage of material for the next 4 years, especially Alec Baldwin who does a fantastic impersonation of President Trump.
On a more serious note, not only did Trump win the election, but the House and the Senate is now also Republican controlled for the first time since the Regan presidency, which suggests that the Republicans will be able to get meaningful changes enacted in this term.
We expect to see lower taxes in the business community, substantial infrastructure spending (especially if he builds that wall), and much large budget deficits in the US.
To date we have seen share markets around the world initially sell off in a panic, and then recover above their original highs, as with Brexit. The bond market however has started to price in higher inflation in the US, given the Trump stimulatory package that is expected to be enacted. This has seen reasonably large falls in bond values, and has added strength to the conviction that the US Federal Reserve will raise rates in mid-December.
Generally speaking this is expected to be good for the US businesses, bad for US and international bonds, and bad for the US’s largest trading partners, if he does place a tax on imported goods. These are all the obvious impacts, but as we all now know with Donald, he is unpredictable at best, and unstable at worst, so we continue to expect the unexpected, and feel this could certainly be an interesting 4 years.
Source: Bloomberg TV
PWA is on the move
As PWA continues to grow we require more office space, and at the end of 2016, we will be moving to a newly refurbished character space located at 99- 115 St Georges Bay Road at the bottom of Parnell. Hopefully the move will be completed before we break for Christmas; however we plan to keep you updated as plans develop.
This is a very fast growing area, with some stunning old style architecture, and our new home will be located on the mezzanine level of the Source Mondial building, on the corner of Faraday and St Georges Bay Road.
6-month global index performance – ending 31st October 2016
Source: Financial Express (FE) Analytics.