This week we released the October edition of Quarterly Strategic Outlook incorporating the outlook for the global economy along with commentary on the key asset classes from our Head of Investment Strategy Keith Poore.
The September quarter was another positive one for our
diversified fund investors. Bonds produced healthy returns with low global
inflation, policy easing from the European Central Bank and ongoing Ukraine
concerns keeping yields well bid. Share markets inched higher over the quarter
assisted by solid earnings both here and offshore. New Zealand shares outperformed global shares
with no change of government removing the uncertainty risk premium. However,
shares have entered a flatter and more volatile return profile recently. This
is something we expect to persist given uncertainty over the path of US rate
tightening and ongoing geopolitical tensions. The New Zealand dollar was
sharply lower over the quarter on another large decline in dairy prices plus
intervention in the currency market by the Reserve Bank of New Zealand.
Improved global sentiment on the US dollar also contributed to the weaker New
Zealand dollar over the quarter.
At the macro level, global growth continues to improve but
that recovery is proving to be increasingly uneven. Despite a weak start to the year, the US
appears to have the greatest upward growth momentum of the major developed
economies. This is leading to divergence
in growth prospects between the US and the Eurozone and Japan, which will soon
progress to a divergence in monetary policy settings. The US Federal Reserve is
likely to begin tightening monetary conditions from the middle of next year
while the European Central Bank and the Bank of Japan are expected to continue
easing for some time. We continue to expect global growth will be stronger in
2014 than 2013. With growth in emerging
markets expected to be unchanged from last year, global growth is forecast to
come in at 3.3% this year. We expect
further recovery over the next two years with growth of 3.7% expected in 2015
and 3.9% in 2016.
The lack of inflation is the key theme in the investment landscape at
the moment. Against this backdrop, we think rising interest rates in the US
will be accompanied by higher growth, which ultimately will be positive for
shares given valuations are not overextended. We expect rising US rates to
modestly pull up global long term yields, lift the US dollar higher, and by
implication push the New Zealand dollar lower. Consequently we remain
underweight the New Zealand dollar, at benchmark for equities, underweight
bonds and overweight cash across our diversified portfolios.
For the full report click here.