Wednesday, October 21, 2015

Quarterly Strategic Outlook - October 2015

This week we released the October 2015 edition of Quarterly Strategic Outlook.  The executive summary is below or click here if you want to access the full document in PDF format. 

The worst quarter in global share markets since the depths of the 2011 euro crisis does not portend the start of a prolonged bear market.  China is not collapsing, global share market valuations are not expensive, US interest rates will not rise materially, the global banking system is better capitalised than in previous years and there are no major housing market bubbles to bring it down.

Recent global growth angst has centred on China.  Concerns were that that a sharper than expected slowdown in the world’s second largest economy would precipitate a slowdown in global economic growth. Indeed China worries had a direct impact on sentiment towards the broader emerging economies, commodities and major developed-economy exporters such as Japan and Germany.

We believe that China growth risks are being overplayed: we are not in the China hard landing camp.   China is going through a challenging transformation but long term we remain of the view that a slower China is a more sustainable China.

More recently there have been increasing signs of “green shoots” of recovery in China.  The good news for exporters of consumer goods to China is that Chinese consumers remain in good heart.  Consumer confidence rose to a 15-month high in September, allaying fears that the recent share market correction would have a detrimental impact on household spending.

Concerns about global growth saw the US Federal Reserve leave interest rates on hold in September.  We still believe an interest rates increase is coming; it’s simply a question of when.  A hike this year is possible, but it’s looking increasingly likely that “lift-off” for US interest rates gets postponed into 2016.

In New Zealand we expect growth to come in at a lower but still solid 2.0 – 2.5% pace over the next 2 years.  Lower growth along with persistently low inflation has allowed scope for interest rate reductions.  We expect one further cut in the Official Cash Rate to 2.5% before Christmas.

The recent correction in shares has restored some value to markets such as the Unites States and New Zealand while other regions such as Hong-Kong listed China shares and European shares have become increasingly inexpensive.

The defensive characteristics of New Zealand shares came to the fore again over the September quarter, limiting the losses to a third of global shares but it still represented the weakest quarter for domestic shares since June 2012. Dividend growth has been a key support for New Zealand shares over the past year but this will slow going forward as distributions have outpaced earnings in recent quarters as companies have responded to dividend hungry investors.

The New Zealand dollar is close to fair value at current levels but the balance of risks are probably to the downside in the near term while China worries are still in focus and domestic and US monetary policy expectations are still diverging.