Investment Update – July 2018


The near-term outlook for the world economy is still positive, however, mounting tensions over a potential US-China trade war suggests an elevated risk to the medium term outlook. We expect events in early July will likely be the key to understand the effect of this potential trade war, as the US is poised to impose the first significant tariffs at that time.

In the US, strong economic growth and low unemployment will likely prompt the Fed to raise rates two more times this year while, in the euro-zone, the ECB is on track to end its asset purchases by December. Any trouble in emerging markets could be largely confined to Argentina and Turkey.


While world trade has softened in recent months, the stability in trade volumes recent months offers some reassurance. Although the protectionist measures and rhetoric have escalated in recent weeks, the consequences do not yet point to anything worse than a modest slowdown of a resilient global economy, supported partly by household spending expanding at a decent pace. Further ahead, however, with monetary tightening set to take a toll on the US economy next year and China losing some momentum, global growth is predicted to slow in 2019 and 2020. This assumes no catalyst. such as a severe trade war, eventuates prior to then.

The US

GDP growth should rebound in the second quarter, helped by the fiscal stimulus of recent tax cuts. This should keep pressure on the Fed to continue gradually hiking interest rates. Markets anticipate a total of four hikes this year and another two in the first half of 2019. As the stimulus fades and the cumulative monetary tightening bites, however, a slowdown in GDP growth could eventually force the Fed to reverse course by cutting rates around 2020.

In June, the Federal Reserve lifted its benchmark interest rate by a quarter of a percentage point, to a range of between 1.75% and 2%, the second rise this year. The last time the rate reached 2% was mid-2008, before the worst of the financial crisis. The Fed hinted at two more rises this year and dropped its statement that monetary policy would remain stimulative for some time.

The UK

The UK’s Monetary Policy Committee (MPC) is unlikely to wait too much longer before adopting more hawkish measures and increasing interest rates. Although the beneficial effects on exports of the pound’s fall may be fading, it is not clear that the sterling boost to growth is over. With sustained rises in real wages anticipated, real

GDP is likely to rise by around 1.5% to 2% over 2018/19. This should allow the MPC to raise interest rates at a faster pace than markets expect. Indeed, the Committee could hike rates in August, and by a further three times by the end of 2019.


The ECB recently announced its plans to end asset purchases this year, but it also clearly outlined that it is in no rush to raise interest rates. Investors’ expectations have now shifted to the view that the expansionary policy is set to continue and that the ECB will wait until late 2019 before raising interest rates.

The Italian financial markets are likely to remain under pressure in the coming months due to concerns about the new government.

Emerging Markets

The growing threat of a US-China trade war and a strong US dollar

are the key risks to emerging markets. Even if trade tensions don’t worsen, GDP growth in Emerging Asia has peaked and is likely to ease over the coming year. Central banks in Indonesia, Korea and the Philippines are likely to raise rates further before the end of the year, but other central banks in the region will be in no rush to follow.

Regional growth is likely to slow over the course of 2018-19 in Emerging Europe. The sharpest slowdown will come in Turkey, where the recent tightening of financial conditions will feed into weaker economic activity. Meanwhile, Argentina’s recently agreed IMF deal imposes an aggressive tightening of fiscal policy, which could push the economy into recession.


Although GDP remains strong, the end of the mining, housing and migration“booms” has softened the outlook for the economy and the financialmarkets. The result is that interest rates are unlikely to rise soon and the Australian dollar could weaken in response to rising US rates. There is a risk that tightening credit controls in response to the Royal Commission into Banking may conspire to weaken Australian housing.

The escalating trade spat between the US and China could potentially boost the Australian economy in the near-term, but any reduction in global trade would be bad news for Australia in the long-term.

Governor Lowe outlined in a speech in late June that, before interest rates are raised from their record low of 1.5%, the RBA will want to have“reasonable confidence that inflation is picking up to be consistent with themedium-term target and that slack in the labour market is lessening”. Weexpect rates to remain on hold until at least the second half of 2019.

In June, the AUD depreciated against the USD by -2.15%.

New Zealand

At home. the Reserve Bank of New Zealand left interest rates on hold at 1.75% in late June. Governor Orr repeated that the OCR will stay at the current expansionary level for a considerable period. Comparing this with the federal funds rate, which pushed higher in June to a target range of 1.75 to 2%, it is the first time since late 2000 that the OCR is lower than the Fed funding rate. In June, the NZD depreciated against the USD by -3.33%.


Global markets continue to face a more balanced set of tailwinds and headwinds than was the case a year ago. While the economic and earnings outlook remains relatively strong, the peaking of leading economic indicators and earnings revisions suggest a more challenging environment as momentum for both slows.

Monetary policy generally remains accommodative and the expectations are for future policy direction to be neutral at best, but more restrictive in the US with multiple rate hikes planned over the balance of 2018. We expect events in July are likely to be key to understand the extent of the impact of the US-China trade negotiations as the first significant tariffs are implemented. We will continue to monitor these events carefully to consider investment risk.

Also, geopolitical risks such as the instability in Italy endangering eurozone stability and the overhang of Brexit negotiations will be important to watch too.

Given the extended period of strength from investment markets, it is important that the risk levels in clients’ portfolios are appropriate.

Investment Update – April 2018

Image courtesy of Chris Khamken,

Potential trade wars and interest rates have dominated the news in March. The first quarter of 2018 continues to show signs of more volatility and nervousness in markets particularly as the US, being furthest of the advanced economies through its cyclical growth, presents a different economic narrative to the rest of the world. Fundamental indicators of economic growth still suggest advanced economies are continuing to grow and stay strong, albeit against a backdrop of political risks surrounding the US’s move toward protectionist trade policies.


The Fed’s decision to raise interest rates in March by 0.25% was widely expected but some have been caught off-guard by the degree to which Fed officials increased their projections for future interest rate hikes. The median forecast for the Fed funds rate at the end of 2019 is now 2.75-3.00%, which until recently was at the hawkish end of the spectrum.

The direct economic impact of the tariffs which have been announced by the Trump administration are unlikely to be significant, and even if they are implemented in full, we suspect that any retaliation will be moderate. Businesses in the US are generally united against the tariffs, and Chinese retaliation would fall hardest on the ‘Farm Belt’ States that helped Trump win in 2016 and heavily rely on the export of soy bean to China. In that event, a trade war may be bad politics as well as bad economics. But the protectionist announcements and actions continue to weigh on investor sentiment as it is unclear that a moderated rational approach will win out in trade negotiations.

With the benefits of the fiscal stimulus, strong global demand and the weaker dollar, the Fed officials raised their forecasts for economic growth, with the median rising to 2.7% this year (from 2.5%) and 2.4% in 2019 (from 2.1%) which we consider slightly optimistic. As the fiscal stimulus begins to wear off and the cumulative monetary tightening starts to bite, GDP growth could slow in the second half of 2019.


The tariffs on Chinese imports outlined by President Trump are unlikely to have a big impact on the Chinese economy directly, and we think that the measures will end up being watered down. But as the recent market reaction highlights, there is a clear risk that investor sentiment continues to deteriorate and the damage from a further escalation of the trade conflict with China could be much greater.

In monetary policy, Chinese authorities are cutting the amount of cash local banks are required to set aside to cover bad loans, a move that would boost lenders’ bottom lines but potentially increase financial risk. With the sector struggling to boost profits, the country’s banking regulator will lower the provision coverage ratio for commercial banks—a requirement to safeguard their ability to weather losses—to a range of 120%-150%, from the current minimum of 150% of their bad loans. It is likely that the recent 5bp rate hike by the People’s Bank of China will not prevent market interest rates in China from continuing to fall, as they have done since the last rate hike in December.


The Euro-Zone should continue its expansion while allowing the European Central Bank (ECB) to wind-down its asset purchases this year, which would mark an end to a period of quantitative easing dating back to the financial crisis. We see it as unlikely that ECB will follow the US and raise interest rates anytime soon.

It is also likely that Europe will exercise restraint when considering retaliatory measures in the face of higher steel and aluminium tariffs, regardless of whether it is granted permanent exemptions, as its interests are to minimise the risk of trade conflict.

In the UK, news that an agreement has been reached on a transition period after the UK formally leaves the EU reduces the risk of a Brexit-related downturn. There is also mounting evidence of higher wage pressures, with average earnings growth at 2.8% in January and suggests that the Bank of England will be sooner, and more likely, to follow the US on interest rates.


In mid-March, the Reserve Bank of Australia (RBA) left interest rates on hold at 1.5% for the 17th consecutive meeting and it noted once again that progress in returning inflation to target is likely to be “gradual”, suggesting that a near-term rate hike remains unlikely.

Further ahead, we expect that interest rates will remain on hold until the second half of 2019. Aside from an acknowledgement that “market volatility has increased from the very low levels of last year”, the new policy statement wasn’t much changed from February’s statement. Indeed, the RBA retained its fairly optimistic view on the outlook for economic growth, saying that it expects the economy to “grow faster in 2018 than it did in 2017”.

The unemployment rate may need to fall from 5.5% currently to around 4.0% before wage growth rises significantly. This is partly due to the existing excess capacity not captured by the unemployment rate, but also as the natural rate of unemployment may be notably lower than most estimates of 5.0%.

The economy will probably cope reasonably well even though both the mining and housing booms are over, but over the next couple of years it is unlikely to strengthen as much as policymakers hope.

New Zealand 

The Reserve Bank of New Zealand Governor Grant Spencer finished his six-month term leaving interest rates at 1.75% for the 16th consecutive month and reiterating that rates are unlikely to rise until the second half of 2020 The new Governor Adrian Orr is unlikely to begin with a bang when he takes over on Tuesday, not least because he will have to deal with a slowing economy and not enough inflation, but we can’t completely dismiss the possibility that he shakes things up a little.

The 2017 fourth quarter GDP report showed a healthy expansion with the RBNZ expected figures growing 0.7% and the trend appears to be in line with expectations and unaffected by an election transition. Weather extremes are likely to affect farming outputs however other well performing areas such as retail and services have contributed to the growth in the economy.

NZ’s underlying economic momentum should continue with the current trajectory of domestic demand growth that will continue to put pressure on capacity constraints and inflation wages over the course of 2018. There is a potential small divergence in business confidence as compared to Australia this year, some explanations suggest that it could be linked to uncertainty surrounding the policies of the new government in NZ. Best estimates are that GDP growth in Australia will accelerate from 2.3% last year to 2.5% this year while growth in New Zealand will probably hold steady close to 3.0% or perhaps drop slightly.


Global macroeconomic indicators still point to a global growth story despite markets becoming increasing cautious and volatile. The first rise in interest rates in the US suggests that inflation is around the corner. US protectionist policies are likely to affect market sentiment more than the fundamentals of economies.

Given the length of the economic recovery and period of strength from investment markets, it is important that clients’ portfolios are no more growth orientated than their long term strategic asset allocations.


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.

Investment Update – March 2018

Photo by Ken Teegardin on Flickr

Aside from the February turbulence in equity markets, global economic growth should hold up well and inflation should remain low in 2018.

The recent hard economic data and survey evidence suggest that the world economy is growing at a rate over 3% pa and there is enough spare capacity in many economies for the expansion to continue for a while yet.

Meanwhile, although central bankers are reducing their policy support for this growth, they are doing so only gradually because inflation generally remains low. One explanation for the recent slump in equity and bond prices is that investors have become concerned that inflation is about to take off, forcing central bankers to tighten policy more rapidly than previously expected. However, underlying inflation has remained low and stable, even in economies which are closest to full employment.

Non-farm payrolls increased by 200,000 in January, following an upwardly revised 160,000 in December, and beating market expectations of 180,000. The share market reacted sharply downwards at the beginning of February to this strong number accompanied by private sector hourly wages increasing from +2.5% to +2.9%. This very good fundamental economic news was interpreted negatively in the context of a rising risk for inflation, and therefore interest rates. In fact, the jump to 2.9% year-on-year in January, which triggered the market sell-off, was exacerbated by temporary weather patterns and may yet be reversed.

The surge in the Conference Board’s consumer confidence measure to a 17-year high of 130.8 in February, from 124.3, underlines that household sentiment has not been knocked by the recent bout of stock market volatility. Instead, it has continued to strengthen, as households begin to see the recently passed tax cuts show up in their pay cheques. We expect the Fed to raise rates a total of three or four times this year, beginning with a 0.25% rise in interest rates in March.

China’s January CPI inflation moderated to 1.5% year-on-year and PPI inflation decelerated further to 4.3% year-on-year. Exports growth inched up to 11.1% year-on-year in January, in line with consensus, and imports growth rebounded sharply to 36.9% year-on-year, partially on distortions of Chinese New Year holidays, significantly above consensus. China has recently proposed removing the two-term limit for the presidency, in a move that would pave the way for Xi Jinping to remain in office beyond 2023 and tighten his grip on power and the economy.\

Japan’s economy grew at a slower-than-expected 0.5% annual rate in the December 2017 quarter, as strong exports failed to fully compensate for relatively weak domestic demand. The preliminary data released in February showed that Japan has now managed eight straight quarters of growth, the longest expansion period since the financial bubble of the late 1980s. The unemployment rate is now at its lowest level since 1993, while January national core CPI (excluding fresh food) was +0.9% year-on-year, unchanged from December. Japan recorded a turn to trade deficit in January, of ¥943.4 bn, from a surplus in December. However, we note that this often occurs in January due to seasonality and this latest deficit was around 15% narrower than in January 2017.

Eurozone concerns over the continued weakness of the US dollar were laid bare in a recent set of European Central Bank minutes that highlighted fears that the Trump administration was deliberately trying to engage in currency wars. The account of the ECB’s January monetary policy meeting also revealed that its hawkish members pushed for a change in the bank’s communications, arguing economic conditions were now strong enough to drop a commitment to boost the quantitative easing programme in the event of a slowdown

In mid-February, the RBA reiterated its forecasts for a more positive growth outlook in Australia and a gradual pick-up in wages and inflation. Even so, key uncertainties remain with regards to the amount of spare capacity in the economy, the speed of recovery in wages and the outlook for household consumption. The RBA will almost certainly leave interest rates on hold at 1.5% at its policy meeting in March and it will probably continue to signal that there is no risk of a near-term rate hike. Indeed, as progress in raising inflation to the 2-3% inflation target is likely to be slow, rates will probably remain on hold throughout 2018 and the first half of 2019 too.

New Zealand
If global equity markets are fearing higher interest rates, as this month’s fall suggest, then Australia and New Zealand offer something of an oasis as both the RBA and the RBNZ have recently dropped some heavy hints that they are in no rush to raise interest rates. This does not mean Australian and New Zealand equity markets are immune to any further global weakness, but it may mean that their bond yields do not rise as far as elsewhere; as well, their currencies may weaken.

While the sudden increase in market volatility in February raises concerns, we do not believe that the bull market in equities has yet come to an end. The underlying fundamentals of the global economy remain very strong. The synchronised global growth currently underway is the best level of economic activity seen this century. Strong global growth is contributing to the strong upward revisions to forward revenues and earnings for companies around the world.

While core inflation is still contained in much of the world, the continued strength in the labour market in the US has heightened fears that wage inflation there is finally taking root. With the US Fed already on a tightening path and with three to four further rate hikes priced in this year, the market has become concerned about the impact of higher long-term rates on equity valuations.

Higher bond rates reflect a stronger global economy and are typical during the latter stages of an economic expansion. Historically, this is also a period when equity returns can be very strong.

A diversified approach to portfolio construction remains appropriate.


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.

Investment Market Update – January 2018

Photo by G. Crescoli on Unsplash

Usually at this time of the year, financial market comments cover the performance of the year just finished and look forward to the likely prospects and outcomes for the coming year.

The Year to 31 December 2017
In an economic sense, this year will be remembered as the year that the US Federal Reserve raised its key policy interest rate three times in the year and promised three more increases in 2018, as well as starting to scale back its massive balance sheet nearly eight years after it started its quantitative easing programme.

In a political sense, it will be remembered as the year of Donald Trump and his policies, the tortuous Brexit negotiations in Europe, the New Zealand elections and the nuclear aspirations of North Korea.

It will also be remembered as a surprisingly strong year for most investment markets.

The performance from bond markets was modest in 2017 as US interest rates moved lower then higher during the year. The US 10-year treasury note yield bottomed at 1.36% in mid-2016. Its yield was 2.41% at year end after starting the year at 2.44%. At the beginning of the year, the official New Zealand cash rate (OCR) was sitting at 1.75% and the Reserve Bank of New Zealand (RBNZ) left it unchanged during the year, following three rate cuts by the RBNZ in March, August and November 2016.

The New Zealand markets had very satisfactory returns for these twelve months compared with Australia and the rest of the world.

Bonds (as measured by the S&P/NZX A Grade Corporate Bond Index) provided a total return (income plus capital gain) of 5.8%, while shares (the S&P/NZX50 Gross Index) provided a 22.0% annual return to equity investors. Listed property shares (the S&P/NZX All Real Estate Index) generated 13.9%.

Beyond New Zealand, sharemarkets were all positive. Australia had a strong year in AUD, 11.8%, and the results from other major bourses in their local currencies were similar, i.e. USA 19.4%, France 9.3% and Germany 12.5%. London, in the throes of its Brexit negotiations, provided a less impressive return of 7.6%.

Therefore, as a composite, the most rewarding sectors in 2017 were New Zealand shares and global shares. For the latter, the MSCI World Index (in NZD) rose by 17.8% in the twelve months.

The Year Ahead
In 2016, nearly all sharemarkets provided positive returns as dividend yields offered higher yields than bonds with the ultra-easy monetary policies and low interest rates around the world.

In 2017, this scenario was effectively repeated even though interest rates began to rise in the second half of the year.

In 2018, there is no sign yet that the synchronised upturn of the world economy is running out of steam even at a time when inflationary forces remain surprisingly low too.

The US Fed’s decision to begin scaling back its balance sheet nearly eight years after it started quantitative easing is a major milestone, but global financial conditions should still remain highly accommodative for a time yet. The latter are probably more influenced by central bank asset purchases throughout the world, which are likely to slow but remain positive at least for the next two years. Although the Fed and Bank of England raised policy rates in late 2017, short-term rates elsewhere will remain very low for the foreseeable future.

However, we are conscious that the bull market of over eight years has seen significant asset price appreciation in shares and that future investment returns are likely to be more modest. It is also clear that the bull market in bonds of the last 35
years is now over.

As statistics emerge around the prospect of higher economic growth, the need for higher interest rates appears to be gaining impetus but it will be a very gradual process.

Although the economic outlook is positive for 2018, we are fully aware that sharemarkets have risen sharply in recent years and valuations are high. Consequently, we will continue to monitor economic and political developments for any negative signals.

We still believe that the risk of an imminent bear market is not high at present. There are two main reasons for this.

  • First, inflation has played an important part in rising bear market risks in past cycles. Structural factors may be keeping inflation lower than in the past and central bank forward guidance is reducing interest rate volatility. Without monetary policy tightening, concerns about a looming recession – and therefore risks of a ‘cyclical’ bear market – are lower.
  • Second, financial imbalances and leverage in the banking system have been reduced post the financial crisis. This makes a ‘structural’ bear market less likely than in the past.

However, there are two portfolio catch-cries to heed to control risk within funds:

  1. Stay well diversified.
  2. Stay close to your benchmark sector targets, i.e. monitor your risk level.

Prudence suggests moderate caution towards markets in 2018.


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.

Investment Update – September 2017

We are of the view that the nine-year equity bull market is not yet over with global stocks posting modest gains amid healthy corporate earnings reports and improving outlooks. The momentum of the world’s three main economies (US, China and Europe) is positive, with growth lifting all nations through accelerating trade volumes. This positive momentum is likely through to 2018, although the outlook is not without risk. At current company valuations, the US equity market is susceptible to the Fed starting to raise the policy interest rate. Additionally, political risk has been an increasing feature of the investment landscape in the last 12 months. Recently, the election-weakened UK government is facing imminent and difficult Brexit negotiations, US President Trump coming under sustained investigative pressure from Congressional committees, and deterioration in relations with nuclear renegade states such as North Korea and Iran, create an environment in which markets could prove more vulnerable to negative news shocks.


In late July, the Federal Reserve kept interest rates unchanged and said it expected to start winding down its massive holdings of bonds “relatively soon” in a sign of confidence in the US economy.

The Fed indicated the economy was growing moderately and job gains had been solid, but it noted that both overall inflation had declined and said it would “carefully monitor” price trends. Steady job creation in the economy has pushed the US unemployment rate to 4.3%, near a 16-year low.


The annual rate of Chinese GDP growth has been on a gradual upward trajectory over the past year, rising to 6.9% in the last quarter to June 2017. Tighter credit conditions imposed were expected to slow real estate investment. On the positive side retail sales and industrial production was up 11% and 7.6% respectively. This supports our contention over the last few years of extreme China angst that the authorities have the will and the means to support the economy when required.


Japan’s GDP second quarter figures showed that it has expanded for the sixth consecutive quarter, led by a strong rise in private consumption. This may be a positive for the Japan sharemarket but the BOJ pushed out any chance of rate rises for another 12 months (2019). This points to keeping monetary policy extremely accommodative for some time yet.


The region’s economy is expanding as year on year growth was up 2.1%, the highest level seen since 2011. Confidence indicators are positive and business sentiment is at levels not seen for a long time. Unemployment across the region is at a nine-year low of 9.1%, GDP growth is expected to be 2.1% for 2017 and inflation of 1.5%.

A lot of this positivity appears to be from a pickup in world trade. The Euro has been one of the best performing currencies over this period increasing against the USD and most of the main crosses.

It is expected that the ECB’s monetary policy will begin to ease, but this is not expected to start until 2018.


The outlook for Australia is moderate growth over the next one to two years, low inflation and an ‘on hold’ central bank, with the risks to growth still to the downside. The Australian economy managed to steer away from a negative GDP result in the March quarter thanks to a modest rise in consumer spending, higher business investment and a bounce back in inventories. Activity data in the second quarter has improved with retail sales spending and exports up, strong business conditions, but growth in 2017 is still likely to be about 2.0%.

Another positive is that the decline in resource sector spend will fade and momentum from other sectors outside of resources will support wage and employment growth in 2018.

The RBA left the cash rate unchanged at 1.50% in its August meeting with an indication they are in no hurry to move the cash rate from here, but the next move could be up.

New Zealand

The New Zealand economy has come through a relatively subdued six months. A series of one-off negatives impacting the final quarter of 2016 (dairy production) and the first quarter of 2017 (transport and construction) conspired to deliver below trend growth of 0.9% over the six months to March. Two consecutive quarters of low growth begs the question of where to from here? With financial conditions supportive, tourism booming and migration strong, we assume a modest rebound over the next few months to around the 0.7% per quarter we think underlying growth is running at. A key implication of the recent Monetary Policy Statement is that, if the economy struggles to reach this growth rate, the Official Cash Rate (OCR) may have to be cut further to deliver the demand pressures required to hit the RBNZ’s inflation target.


Earnings momentum is now positive for all major equity regions and we expect this to continue, supported by a solid economic backdrop. A normalising global economy should allow central banks to unwind their ultra-accommodative interest rate policies. We believe that long bond yields are set to rise further during 2017 and 2018.

Improving economic growth around the world will generally support equities and challenge bonds. That’s because this growth is more ‘traditional’ in nature, arising from better employment and demand, and thus allowing prices (and potentially profits) to rise.

For the remainder of 2017 we are not anticipating further significant upside in either Australasian or global share markets. Investors are aware of high valuations and may well move to protect the capital gains in their portfolios, rather than take on additional risk. An alternative scenario – market ‘euphoria’ in which investors simply become too complacent and push markets up into a climax marked by narrowing leadership and mounting volatility – remains a distinct risk, but it is still not our main case. This assessment could change if monetary policy normalization were to be interrupted and put on hold yet again, whether for economic or geopolitical reasons. Given the clarity with which the major central banks are now preparing markets ahead of policy moves and the robustness of the global expansion, any significant interruption seems unlikely.


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.

Investment Update – June 2017

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.

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%.

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.

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.

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.

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.

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.


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.