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Harbour Macro Research Day: Mixed Signals

Hamish Pepper web
Hamish Pepper | Posted on Nov 28, 2019
  • Harbour’s internal Macro Research Day is a chance to hear from external research providers, challenge assumptions and anchor our medium-term view.
  • The local outlook is mixed. Monetary conditions have eased and should support a recovery, but structural impediments mean business confidence may not pick up.
  • The global picture has improved which makes additional central bank support less likely.

Harbour held its bi-annual internal Macro Research Day recently where, with the help of several external speakers, we examined the drivers of poor New Zealand business confidence, the outlook for the domestic economy ahead of next year’s election and global risks. The Macro Research Day is an important part of Harbour’s research calendar, providing a chance to test our medium-term view of the market outlook.

The key takeaways were:

Despite the Reserve Bank of New Zealand (RBNZ)’s recent unexpected pause, New Zealand monetary conditions have eased materially this year and should support a recovery in activity.
The household sector will play a vital role via higher house prices, increased residential investment and consumption (driven by both lower interest rates and a positive housing wealth effect). The figures below show the RBNZ expects house price inflation to increase to 6% year on year (y/y) in the middle of next year helped by the recent drop in interest rates. Since December 2018, 2-year standard mortgage rates have dropped 80 basis points (bp), 6-month term deposit rates have fallen 60bp and the New Zealand dollar Trade Weighted Index has depreciated by almost 5%. New Zealand exporters have been particularly fortunate as the currency weakness has unusually occurred alongside a substantial increase in New Zealand’s terms of trade.


Source: RBNZ,

Low interest rates may not help low New Zealand business confidence as this largely reflects structural factors.
Output is not constrained by financing but instead by a lack of labour and capital, which is also driving up firms’ cost of production. Most sectors cannot pass on these higher costs due to international competition and price transparency, resulting in ongoing margin compression. Additional business concern comes from environmental policy uncertainty with the Resource Management Act currently under review, for example.

An improved global outlook makes additional central bank support less likely.
Global data surprises have become less negative. Trade risks remain but have reduced as the US and China approach signing of a “phase one” trade deal and the Brexit deadline was extended by three months to 31 January 2020. In response, central banks, including the RBNZ, have become less dovish.

Some of the implications for portfolios, which we have now incorporated, include:

  • The uncertain environment creates challenges for equity markets and favours an active management approach. We think some sectors are better positioned than others. For example, we favour healthcare and technology over banks, utilities and cyclicals.
  • Income equities are vulnerable to higher rates and, while earnings strength may provide some support for growth equities, we prefer to sell rallies for multi-asset funds.
  • We have likely seen the low in bond yields and will be cautious when adding duration.
  • The improvement in the macro outlook should support credit spreads at relatively tight levels.

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