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March/April 2009
ECONOMIC COMMENTARY
Outlook for Investment Markets
World share markets have welcomed news that the US Treasury is taking further major steps to
curb the credit crisis, by buying Treasury bonds and dealing with toxic assets. While it is possible
that the worst of the crisis is now behind us, growth assets continue to face further challenges
from a global downturn which has intensified in recent months.
Australasian Equities
The New Zealand share market has followed the lead given by markets overseas, hitting a new
low in early March and then rallying, particularly in the wake of US initiatives to curb the credit
crisis. The result is that the NZX50 is up, showing a small gain for the past month. The latest
(March) New Zealand Institute of Economic Research consensus economic forecast is picking
that GDP will have declined by 0.90 percent in the current year to 31st March 2009, and will shrink
further again in the year to March 2010.
The Australian market was more buoyant than the New Zealand market. Unsurprisingly new
moves to fix the global financial system’s woes did wonders for financial shares, the Australian
banks up 17.80 percent over the past month. The resources stocks continued their gradual
recovery also. The immediate outlook for the Australian economy is also for a cyclical slowdown.
There are widespread expectations that the economy may well have contracted further in the
current March quarter. Business forward orders are down to levels not seen since 1991.
Both countries are in a clear slowdown and one that may last for a good part of this year. The
better news is that New Zealand and Australia continue to be less affected by the global
slowdown than many other developed economies. Australasian shares therefore continue to look
well-placed compared to those of economies with steeper downturns in prospect.
International Equities
World shares also hit a low point in early March but have since recovered. This rally has not
however fully compensated investors for the earlier pronounced weakness. The rally was largely
because of two new US policy initiatives. The first was the US Treasury plan to buy Treasury
Bonds, which would lower long-term interest rates, including mortgage rates, as well as injecting
cash into the financial system. The second was the toxic asset plan, which envisaged using
public and private money backed by federally guaranteed debt to bid for financial institutions’
problem assets. This initiative was greeted especially warmly by world share markets. It remains
to be seen whether these initiatives mark the beginning of the end of the global financial crisis,
and that markets are correct to respond warmly to them, or whether there can be a meeting of
minds between potential investors in distressed assets and potential sellers. The plan could also
be overwhelmed by the global downturn. The World Trade Organisation is forecasting world
trade to contract by an unprecedented nine percent this year, and growth forecasts for the major
economies are still being revised down. Despite this dim outlook, the past month has seen the
first real signs that investors’ anxieties about the financial outlook may be turning for the better.
Australasian Property
The New Zealand listed property sector enjoyed the same sort of bounce as other property
markets, after the announcement of new moves in the US to curb the credit crisis. Kiwi property
stocks did not hold onto these gains though and the sector ended the month effectively where it
began. Greater rises in prices of overseas property shares are an indirect complement to the
New Zealand companies. They typically have been less leveraged than their overseas
counterparts, and less exposed to severe economic downturns. A resolution to the global credit
crisis therefore mattered more to overseas companies than to New Zealand’s property stocks,
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© Morningstar Research Ltd. All rights reserved. All care has been taken in preparing this report but to the extent that it is based on information received from other parties no liability is accepted by
Morningstar or Personal Investment Centre Ltd for errors contained in the report or omissions from the report. Morningstar and Personal Investment Centre Ltd give neither guarantee nor warranty nor
make any representation as to the correctness or completeness of the information presented. Past performance is no guarantee of future performance. To the extent that any Morningstar or Personal
Investment Centre Ltd data or commentary constitute general advice, this advice has been prepared by Morningstar Research Pty Ltd / Personal Investment Centre Ltd and does not take account of your
objectives, financial situation or needs. Before acting on any advice, you should consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. We recommend
you obtain financial, legal and taxation advice before making any financial investment decision. All potential investors should obtain a Product Disclosure Statement relating to the product and consider the
Statement before making any decision about whether to acquire the product.
and ours rallied less (equally they had fallen far less as the credit crisis unfolded). This is not to
say that the local listed property sector is problem free. The trend in the past few months has
been for asset devaluations (as higher financing costs have translated into lower property
valuations) and for cuts in distributions. Even on lower payouts the sector remains attractive with
yields well in excess of what’s on offer from local cash or bonds.
The Australian listed property sector has finally shown a positive return, though earlier
pronounced weakness means that over longer period’s investors are still well in the red. The
outlook is still highly problematic, with very poor results still being posted. Financing issues still
remain acute and distributions are being cut back as companies conserve cash in a world of
scarce and expensive credit.
Cash and Fixed Interest
New Zealand – Short-term interest rates have been steady with markets already fully anticipating
the Reserve Banks likely move. Longer-term interest rates, however, have risen for the first time
in over a year. As a consequence the New Zealand Dollar has appreciated against the U S
Dollar. The Reserve Bank’s statement on 12 March said that the Bank expected the current
economic downturn to trough around mid-year, with a gradual pick-up thereafter. The Bank also
noted that significant uncertainties remain around the timing and extent of global economic
recovery and the global financial crisis and that it might need to cut rates again, although any
further cuts will be much smaller that those observed recently. The rise in longer-term rates is a
signal that countries like New Zealand, with balance of payments and banking system requiring
external financing, will have to expect to pay more in a capital-constrained global financial
system. The rise in government bond yield may reflect some easing in investors’ worst fears
about the global crisis and also some concerns about the volume of future government borrowing
requirements. The outlook for the New Zealand Dollar continues to remain uncertain when
sudden shifts in sentiment can produce very large moves in exchange rates. For now the New
Zealand Dollar is the beneficiary of investor concern over the US government’s plans to boost the
supply of US Dollars, which is driving down US Dollar value.
Australia – Longer-term interest rates have risen for the first time in over a year, with the
Australian Dollar jumping against the US Dollar. The Australian Dollar has also risen in overall
trade-weighted value over the past month. The minutes of the Reserve Bank’s board meeting on
3rd March showed that members were torn between cutting rates again, given evidence of a
sharply weaker global economy, or waiting to see whether previous rate easings and other moves
to stimulate the economy had been enough to stabilise the ship. The likelihood is that another
modest cut may yet be needed. As is the case with the New Zealand Dollar the Australian Dollar
is for now the beneficiary of investor concern over US government plans.
International – Short-term interest rates look set to remain very low, as central banks continue to
use monetary policy to attempt to mitigate the extent of the global slowdown.
The content within this commentary has been extracted from Morningstar Research Pty Ltd March/April Economic
Update
__________________________________________________________________________________________________________________________________________________________________
© Morningstar Research Ltd. All rights reserved. All care has been taken in preparing this report but to the extent that it is based on information received from other parties no liability is accepted by
Morningstar or Personal Investment Centre Ltd for errors contained in the report or omissions from the report. Morningstar and Personal Investment Centre Ltd give neither guarantee nor warranty nor
make any representation as to the correctness or completeness of the information presented. Past performance is no guarantee of future performance. To the extent that any Morningstar or Personal
Investment Centre Ltd data or commentary constitute general advice, this advice has been prepared by Morningstar Research Pty Ltd / Personal Investment Centre Ltd and does not take account of your
objectives, financial situation or needs. Before acting on any advice, you should consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. We recommend
you obtain financial, legal and taxation advice before making any financial investment decision. All potential investors should obtain a Product Disclosure Statement relating to the product and consider the
Statement before making any decision about whether to acquire the product.