by Miles Flower | Jun 27, 2017 | Investment News
Many economists continue to forecast a synchronised global economic recovery: they expect global real GDP growth at 3.0% in 2017 and 2.9% in 2018 compared with 2.5% in 2016.
Even though expectations for the size, scope and timing of US tax cuts have diminished, it is still possible a significant fiscal package will be passed in the US, providing the global economy with a further tailwind in 2018. Tighter labour markets and rising business confidence should strengthen investment spending in the US and Europe, while private capital expenditure in China has rebounded. China’s accelerating investment growth should support robust demand for commodities for the remainder of 2017.
US
In early May, the Federal Reserve left official interest rates unchanged so the probability of a June rate hike has moved higher. Janet Yellen acknowledged that household spending growth had grown “only modestly” lately, but emphasised that the “fundamentals” behind consumption growth remained solid.
US non-farm payroll jobs data in April was stronger than expected (+211,000 actual versus +185,000 expected), unemployment fell to 4.4% (a 10-year low) and wages growth was +2.5% year-on-year versus +2.7% expected.
The consumer price index (CPI) increased by just 0.17% in April and the year-on-year rate actually fell by two tenths to 2.2%.
China
The economy had a strong start to the year with GDP growth of 6.9% compared with the same quarter last year. Industrial output rose by an impressive 7.6% in the same three months. The economy continues its rebalancing with consumption now accounting for a much larger proportion of this growth.
Japan
The Governor of the Bank of Japan said that he will continue with very accommodative monetary policy and maintain the current pace of asset purchases for some time yet. While Japan’s economy is doing better than a few months ago, he said that the inflation rate is still quite sluggish, the exchange rate could affect inflation in the short term and that, if the yen appreciates, there is a chance of a delay in hitting Japan’s 2% price goal.
Europe
The euro area GDP growth of 0.5% quarter-on-quarter in the first quarter of the year was in line with (the quite robust) expectations i.e. an annualised rate of about 2%pa.
Australia
As widely anticipated, the RBA left the cash rate unchanged in early May. Its meeting statement was also little changed from the April version. The Bank did say that the data is evolving broadly in line with its expectations, that growth would return above 3% and that core inflation is rising back to the target band. Officials also noted that the terms of trade continue to boost national income, although some of this effect is in the process of reversing.
In mid-May, the government issued its Budget: it was contractionary in nature, with the deficit expected to shrink from 2.1% of GDP in 2017 to 1.6% in 2018.
It could be argued that the combination of sub-trend GDP growth, above-trend unemployment and near stagnant wage inflation actually require bigger deficits in the near term, not smaller. The main feature was a new levy on the big four banks and Macquarie Group. The new tax will cost these five companies around $1.5bn p.a., or about 5% of current profits.
New Zealand
The next move in NZ rates will probably be higher, but the move is still likely to be a mid-2018 story. In mid-May, the Reserve Bank left the Official Cash Rate (OCR) unchanged at 1.75% and said:
Global economic growth has increased and become more broad-based over recent months. However, major challenges remain with on-going surplus capacity and extensive political uncertainty.
Stronger global demand has helped to raise commodity prices over the past year, which has led to some increase in headline inflation across New Zealand’s trading partners. However, the level of core inflation has generally remained low. Monetary policy is expected to remain stimulatory in the advanced economies, but less so going forward.
The trade-weighted exchange rate has fallen by around 5% since February, partly in response to global developments and reduced interest rate differentials. This is encouraging and, if sustained, will help to rebalance the growth outlook towards the tradables sector.
The increase in headline inflation in the March quarter was mainly due to higher tradables inflation, particularly petrol and food prices. These effects are temporary and may lead to some variability in headline inflation over the year ahead. Non-tradables and wage inflation remain moderate but are expected to increase gradually.
Summary
The environment for equities remains broadly neutral, as central banks unwind their stimulatory policies in response to improving growth prospects rather than the need to stamp out any problematic rising inflation. However, even though interest rates are starting to rise, bonds are not yet particularly attractive.
In May, the relative calm in sharemarkets drove a widely watched measure of anxiety, the CBOE Volatility Index, or VIX, to its lowest level since 1993. Investors appear to be as sanguine about the stock markets as they have been in almost a quarter of a century, despite months of global political turmoil. May’s election result in France of the centrist candidate Emmanuel Macron as president helped remove a major market overhang and gave investors more confidence that shares are unlikely to face a big selloff.
A balanced and diversified approach to investment remains appropriate.
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Information and Disclaimer:
Source: JMIS Limited, the investment consultant to the Select Wealth Management service.
This report is for information purposes only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should contact Miles Flower on 021 645 000.
by Miles Flower | May 18, 2017 | Investment News
In assessing prospects for markets, investors remain understandably focused on political risks: there are political outcomes in the US, Europe, and Asia that could well invite a more pessimistic outlook this year but economic fundamentals should not be ignored. In the absence of political shocks, the global economy should grow at a healthy pace even though the extraordinary amounts of monetary stimulus seen in recent years will probably abate. Although expectations for the size and scope of the US tax cuts and reforms have diminished, it is still possible a significant package is passed, one that would provide the global economy with a new growth tailwind in 2018.
US
Federal Reserve officials are zeroing in on a strategy to begin winding down their $4.5 trillion portfolio of mortgage and Treasury securities, possibly later this year, as part of their broader effort to lessen stimulus in the financial system. Under the emerging strategy, the central bank would raise short-term interest rates two more times in 2017 and then potentially pause rate increases, perhaps late in the year. That would allow Fed officials to start winding down their portfolio of securities in a gradual and measured way to assess how markets handle the moves before resuming additional rate increases in 2018.
However, recent key US economic statistics have been mostly disappointing. Nonfarm payrolls increased only 98,000 in February, but household employment rose sharply for a third consecutive month on an adjusted basis and the unemployment rate fell to 4.5%, its lowest level since May 2007. In March, the consumer price index declined by 0.29% and the year-over-year rate decelerated by 0.3% to 2.4%, while retail sales decreased 0.2%.
China
Labour costs continue to grow strongly and now represent a significant component of production costs in many Chinese industries. Aggressive cost cutting measures have been implemented in recent years by Chinese companies in the wake of excess capacity and tepid global demand. Absent weakness in the currency, further increases in labour and other input costs will force companies to raise prices to remain profitable, which would see China become an exporter of inflation rather than of deflation.
First quarter GDP and March activity growth surprised on the upside. Retail sales posted a particularly large jump, bouncing back from a weak reading in January-February. Overall economic growth is tracking well above the policy target so far in 2017
Japan
Japan’s Consumer Confidence Index (for general households) has remained high since the beginning of 2017 and in March it rose 0.7 points to 43.9 to a level not seen since after the launch of Abenomics in 2013. The Cabinet Office raised its assessment of consumer sentiment to ‘picking up’, from ‘showing signs of improvement’ in February.
Europe
In late March, Theresa May triggered a two-year countdown to Britain’s break from Europe by serving notice to Brussels that she intends to end their 44-year relationship, while in mid-April she called a snap UK general election.
Australia
In early April, the RBA left official rates unchanged at 1.5% for its seventh consecutive meeting and stated:
“Conditions in the global economy have improved over recent months and this has contributed to higher commodity prices, which are providing a significant boost to Australia’s national income.
Headline inflation rates have moved higher in most countries, partly reflecting the higher commodity prices. Core inflation remains low. Long-term bond yields are higher than last year, although in a historical context they remain low. Interest rates have increased in the United States and there is no longer an expectation of additional monetary easing in other major economies.
The Australian economy is continuing its transition following the end of the mining investment boom. Recent data are consistent with ongoing moderate growth. Most measures of business confidence are at, or above, average and non-mining business investment has risen over the past year. At the same time, some indicators of conditions in the labour market have softened recently. In particular, the unemployment rate has moved a little higher and employment growth is modest. The various forward-looking indicators still point to continued growth in employment over the period ahead. Wage growth remains slow.
Inflation remains quite low. Headline inflation is expected to pick up over the course of 2017 to be above 2%.
Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”
New Zealand
In late March, the Reserve Bank left the official rate unchanged at 1.75% and stated:
“Macroeconomic indicators in advanced economies have been positive over the past two months. However, major challenges remain with on-going surplus capacity in the global economy and extensive geo-political uncertainty.
Global headline inflation has increased, partly due to a rise in commodity prices, although oil prices have fallen more recently. Core inflation has been low and stable. Monetary policy is expected to remain stimulatory, but less so going forward, particularly in the US.
Quarterly GDP was weaker than expected in the December quarter, but some of this is considered to be due to temporary factors. The growth outlook remains positive, supported by on-going accommodative monetary policy, strong population growth, and high levels of household spending and construction activity. Dairy prices have been volatile in recent auctions and uncertainty remains around future outcomes.
Monetary policy will remain accommodative for a considerable period.”
The March 2017 quarter CPI outturn showed a quarterly increase of 1.0% and an annual rise of 2.2% – this was the highest annual increase since the September 2011 quarter and above median market expectations.
Summary
The environment for equities remains broadly neutral, as central banks unwind their stimulatory policies in response to improving growth prospects rather than the need to stamp out any problematic rising inflation. However, even though interest rates are rising, bonds are not yet particularly attractive.
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Information and Disclaimer:
Source: JMIS Limited, the investment consultant to the Select Wealth Management service.
This report is for information purposes only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should contact Miles Flower on 021 645 000.
by Miles Flower | Apr 13, 2017 | Investment News
Solid global economic growth is expected in 2017. However, political uncertainties could create turbulence and any expectations of further economic stimulus may be optimistic. Improving economic growth will generally support equities and challenge bonds, because this growth is now more “traditional” in nature, i.e. it arises from better employment and demand, thus allowing prices and potentially profits to rise, rather than the ultra-loose monetary policies of recent years.
US
We expect GDP to accelerate in 2017, primarily driven by strong consumption, higher employment and stabilising business investment. Consumer confidence measures have been surging since the Trump election and the outlook for investment is improving, i.e. less regulation, lower taxes and higher defence spending should support selected US companies.
Three recent developments have confirmed the likely upward path of US interest rates. First, US core inflation has risen more than expected. Second, incoming data have been consistent with strong global growth momentum. Third, Fed rhetoric has become increasingly hawkish.
In early March,solid US employment data report (+235,000 jobs, unemployment lower at 4.7% and average earnings +2.7%) set the stage for the widely-anticipated interest rate hike by 0.25%.
China
We expect GDP to be around 6.5% in 2017, slightly lower than last year’s range of 6.5%-7%. China has been criticized by the World Bank and others for lofty growth targets that push up debt levels, but China has many “innovative tools and policy options” to reach this target and the “confidence, the ability, and the means to forestall systemic risks.”
Politics dictates that economic growth take priority over any reform effort in 2017, as the Communist Party will set a leadership slate at the end of the year for the next half-decade – and there is little tolerance for instability that could disrupt President Xi Jinping’s second-term mandate.
Japan
After a strong fourth quarter of 2016, the Bank of Japan revised up its forecast for growth in the current year from 1.0% to 1.4%.
Europe
Mario Draghi (ECB president) has declared victory against deflation and moved a step towards ending the European Central Bank’s ultra-loose monetary policy, sending the euro and German bond yields higher as investors bet on the end of crisis-era stimulus measures. The ECB president said the bank decided to change its guidance to investors – omitting a reference to using all the weapons in its policy arsenal – because of its success against a destabilising bout of falling prices. Though the ECB agreed to keep interest rates at record lows, Mr Draghi said the bank no longer had a “sense of urgency” to take further action on monetary stimulus and that policymakers “do not anticipate that it will be necessary to lower rates further”.
We expect the euro area GDP growth to accelerate to 2.0% this year on the back of stronger investment, improved export growth prospects and higher government spending, but continue to expect the ECB’s asset purchases at the rate of €60bn a month at least until December 2017.
Australia
As expected, in mid-March, the RBA left the official interest rate unchanged at 1.5%. The accompanying RBA statement was little changed from the last one, but the changes that were made reflected the recent data flow – notably, the upside surprise to GDP, the draw down on household savings and the trend weakness in full-time employment. The RBA continues to place the global reflation story at the core of its views.
New Zealand
The RBNZ left the official interest rate unchanged in late March as expected at 1.75% and said that “monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly”.
The December 2016 quarter’s GDP increase of 0.4% was well below both RBNZ and market expectations for quarterly increases of around 1.0%. At a sectoral level, the key contributor to this weaker-than- expected rise was the decline in agriculture (down 0.6% on falling milk production).
Over the year ahead, we would assess that the key risks to the projected profile of a continuation of above trend NZ GDP growth is likely to emanate from developments in the international economy. In particular, US political risks or policy moves from the Trump administration could easily result in a heightened state of market agitation.
On the domestic front, we assess the largest downside risks are associated with a potential sharp correction in house prices – estimated to be nationally overvalued by more than 30% – together with a potential rise in political risks associated with the upcoming 23 September general election. In particular, reflecting the contribution to growth currently coming from historic high levels of net migration, any major policy changes in migrant numbers following the election has the potential to have a reasonably significant effect on headline GDP growth rates going forward.
The RBNZ also noted that “the trade-weighted exchange rate has fallen 4% since February, partly in response to weaker dairy prices and reduced interest rate differentials. This is an encouraging move, but further depreciation is needed to achieve more balanced growth “.
Summary
Even after the strong rise in share values over the last 8 years, we are cautious but not bearish on shares as there is no sign of recession for 2017 and financial authorities appear prepared to do whatever is required to ensure that the financial markets are well supported. Moreover, projected company earnings growth should gradually support current sharemarket valuations.
However, we also note that inflation and longer term interest rates are starting to rise, signalling the probable end of the 35-year bull market in bonds. This may well prove a headwind for equity markets later this year.
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Information and Disclaimer:
Source: JMIS Limited, the investment consultant to the Select Wealth Management service.
This report is for information purposes only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should contact Miles Flower on 021 645 000.
by Miles Flower | Mar 28, 2017 | Investment News
Looking back on 2016, two events stand out: Brexit and the US presidential election. In both cases, polls on results were wrong, but sharemarkets still defied expectations – and rose. In 2017, we expect US politics and policies will again play a major role in driving markets and creating volatility. In addition now, accelerating world growth and inflation, a stronger US dollar and a resurgent commodity cycle confound the investment outlook.
US
In January, the Federal Reserve signalled it remains on course for further increases in short-term interest rates this year as inflation heads back towards target levels, but it avoided giving strong indications on the timing of the next move. The US central bank’s Federal Open Market Committee left the federal funds target range at 0.5% to 0.75%, following a 0.25% increase at the prior meeting in December. The unchanged move was expected by markets and financial analysts.
Non-farm payrolls increased by a strong 227,000 in January, higher than the upwardly revised 157,000 in December and above market expectation of 175,000. The unemployment level now stands at 4.8%.
China
In early February, the People’s Bank of China (PBOC) increased interest rates on OMOs (open market operations) by 10bp and on its SLF (standing lending facility) by 10-35bp, shortly following the rise in interest rates on its MLF (medium-term lending facility) in January. We believe that the PBOC will retain its tightening bias in the near term as the underlying financial-leverage and macroeconomic arguments for tightened monetary policy have largely remained.
Chinese overseas deals worth almost $75bn were cancelled last year as a regulatory clampdown and restrictions on foreign exchange caused 30 acquisitions with European and US groups to fall through. The figures, which reveal a sevenfold rise in the value of cancelled deals from about $10bn in 2015, highlight a waning appetite for global deal-making by the world’s second-largest economy.
Japan
The 2016 current account came in at a surplus of ¥20.6 tn, up ¥4.2 tn from the prior year. This represents the first recovery to a surplus over the ¥20 tn mark since 2007 and primarily reflects a turn to surplus in the trade balance of ¥5.6 tn. While 2016 exports were down, at -8.5% yoy, imports saw an even larger decline, of -16.6%.
Europe
The US bond markets remain calm, but Europe is not quite so stable with upcoming elections in France, Italy and the Netherlands causing some investor discomfort. It was only a few months ago that Europe seemed to be facing deflation or stagflation but now inflation is returning. Bond investors are migrating to safer assets such as German and UK bonds rather than bonds in the remaining European countries.
Australia
In mid-February, the RBA kept the Australian cash rate unchanged at 1.50%. The RBA’s policy stance presently remains neutral. Importantly, officials continue to highlight income gains from terms of trade improvement, with the potential for these gains to support the mining capex cycle.
Officials see the third quarter contraction in real GDP as temporary and expect growth to return to a 3% per annum pace. They also remain of the view that core inflation will bottom at 1.5% per annum.
However, 2017 will be a difficult year owing to weakness in business capex, fragility in residential investment, a cash flow squeeze on consumers and limited scope for import substitution. The delayed effects of macro-prudential and exchange rate tightening are likely to manifest this year. Having said this, there is no incremental tightening effect visible just yet to prevent a moderate recovery.
We expect the RBA may cut rates in 2017: in our view, we are unlikely to get a sufficiently large, timely or sustained fiscal stimulus package to prevent the RBA from cutting further.
Australia’s unemployment rate fell to 5.7% in January.
New Zealand
In mid-February, the RBNZ kept the New Zealand cash rate unchanged at 1.75%. We expect no changes this year.
The New Zealand economic backdrop suggests a continuation of above- trend growth, with near-term GDP growth expected to be in the region of 3.0-3.5%. Underpinning this positive growth environment continues to be the drivers of historic high levels of net migration and tourist arrivals. While there are initial signs that recently introduced LVR restrictions from the RBNZ are beginning to negatively impact on housing market activity, the broader construction sector is expected to continue to be a positive contributor to growth over the year ahead.
The upward movement in annual headline CPI inflation over the December 2016 quarter back into the RBNZ’s 1-3% inflation target band largely reflected the effect of higher housing-related prices, together with the impact of petrol price-induced weakness seen in the December 2015 quarter falling out of the annual calculation. The movement of annual headline inflation to back within the RBNZ’s 1-3% inflation target band is likely to be of some comfort to the RBNZ, following the previous two years in which CPI outturns have been below the bottom of the band.
New Zealand continues to create growth without much inflation accompanied by significant job expansion, rising fiscal surpluses and a well-contained current account balance. An improving global economy and growing tailwinds from rapidly increasing dairy revenues are adding to business optimism.
Summary
The last eight years have been characterised by low growth, low interest rates and low inflation, as governments have moved to stimulate the global economy after the global financial crisis. These policies have been largely successful, so we are now entering a higher growth phase.
However, there are uncertainties to this positive outlook, given the policy stance of the new US administration and its global ramifications.
Nevertheless, in the short term, we think markets will be supportive and, with some volatility, probably “grind higher”.
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Information and Disclaimer:
Source: JMIS Limited, the investment consultant to the Select Wealth Management service.
This report is for information purposes only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should contact Miles Flower on 021 645 000.
by Miles Flower | Feb 20, 2017 | Investment News
2017 will be a year of stronger global economic growth. The incoming US administration promises to stimulate an economy already enjoying considerable momentum, while the Chinese authorities are expanding fiscal policy. Meanwhile, global PMIs (purchasing managers’ indices) are once again rising in tandem. For shares, earnings momentum has already started to turn higher in each of the major global markets to help to support their valuations.
US
In January, the World Bank said that the U.S. economy is picking up steam and stabilizing commodity prices are helping major emerging-market economies rebound as well. The bank estimates that Donald Trump’s proposals to slash corporate and personal income taxes could add up to 0.3% to American growth this year and up to 0.8% next year.
However, he is forming an economic team with competing power centres and contrasting views that could lead the White House in unpredictable directions, as it tries to steer the U.S. toward even faster growth, and provide some market volatility. He has market-oriented advisers from the Washington and Wall Street establishment on one side and free-trade sceptics on the other.
China
The economics get-together of world leaders at Davos earlier this year will be remembered as delivering one of the strangest episodes in global economic history, as it marked a moment in time when a communist party leader lectured the US President about the benefits of free trade and economic openness.
Chinese President Xi Jinping issued a full-throated defence of international trade and economic integration, as doubts about the merits of globalization mount in the U.S. and elsewhere in the West. “No one will emerge as a winner in a trade war,” Mr. Xi, the leader of the world’s second-biggest economy, said to members of the world elite gathered for the annual World Economic Forum. “Pursuing protectionism is just like locking one’s self in a dark room. Wind and rain may be kept outside, but so are light and air.”
In December, China’s PPI (producer price inflation) surged to a five-year high of 5.5% YoY (previously 3.3% YoY), way above market expectations. The increase was broad-based across subcomponents but most pronounced in the mining and raw materials sectors due to rising commodity prices as well as a weaker currency. Contrary to producer prices, consumer price inflation moderated in December to 2.1% YoY (from 2.3% YoY), as food price inflation normalized from elevated levels.
Japan
After a long year in 2016, the Bank of Japan (BOJ) now unexpectedly finds itself in a sweet spot. The yen has tumbled in recent months, thanks to surging global bond yields, while economic conditions at home and abroad are improving. Though less than bullish, the outlook for the world’s third-largest economy looks more promising than it has for some years. One risk now is that the yen falls too far, too fast, hurting consumers’ purchasing power just as they seemed to be finally shaking off the effects of a 2014 sales-tax increase.
Economists have speculated that the BOJ will need to lift its current rate target for the yield on the 10-year Japanese government bond from around zero percent to minimize the rate divergence that is helping to fuel yen weakness.
Europe
Mario Draghi, head of the European Central Bank (ECB), faces risks highly charged elections in the euro zone’s biggest economies this year. Barely a month after announcing a half-trillion-euro extension of the ECB’s quantitative-easing program and hinting the bank would do little for most of 2017, its president is back in the spotlight amid an anti-European Union backlash across the region. ECB officials extended their bond-purchase program by a longer-than-expected nine months in December 2015 to help counter potential volatility “relating in particular to shocks emanating from the political environment.”
Australia
In January, Australian CPI data saw inflation surprising to the downside. In the fourth quarter, CPI rose by only 0.4%, taking year-ended core inflation lower to 1.6% from 1.7%. Headline CPI was also subdued, rising by only 0.5% in this last quarter.
We now expect the RBA to downgrade its growth forecasts for the economy and a February official rate cut is a “close call”.
New Zealand
We expect GDP growth to moderate from 3.3% in 2016 to a still respectable 3.0% in 2017, albeit with some renewed inflation. The December 2016 quarter CPI outturn showed a quarterly increase of 0.4% and an annual rise of 1.3%.
Any potential official interest rate increase this year is complicated by RBNZ Governor Wheeler’s term expiry in September and the pending New Zealand election. Consensus is therefore for a late 2017, or early 2018, rise in rates.
The current supportive economic factors include high net immigration, the strong tourism and building sectors and the current low OCR setting of 1.75%, while negative factors are the high NZ dollar, excessive house inflation, slower domestic growth on a per capita basis and the rise in political uncertainty in the run-up to the general election this year.
Summary
Even after the strong rise in share values over the last 8 years, we are cautious but not bearish on shares as there is no sign of recession for 2017 and financial authorities appear prepared to do whatever is required to ensure that the financial markets are well supported. Moreover, projected company earnings growth should support current share market valuations.
However, we also note that inflation and longer term interest rates are starting to rise, signalling the probable end of the 35-year bull market in bonds. This may well prove a headwind for equity markets later this year.
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Information and Disclaimer:
Source: JMIS Limited, the investment consultant to the Select Wealth Management service.
This report is for information purposes only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should contact Miles Flower on 021 645 000.
