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Harbour Macro Research Day

Harbour sails 5
Harbour team | Posted on Apr 16, 2019
  • Harbour’s Macro Research Day is a chance to revisit research anchoring our medium-term view.
  • Locally, we expect economic activity to moderate rather than slow sharply. While on one hand the market is pricing in cuts to the OCR, we continue to see core inflation measures rising which means that rate cuts, while possible, are not a done deal.
  • Globally, we see global monetary policy remaining supportive of financial markets. While global growth has moderated in recent months, the likelihood of a recession is still low.

In recent years, Harbour’s internal six-monthly Macro Research Day has been an important part of our research calendar. It provides an opportunity to undertake a thorough review of the medium-term outlook for the macroeconomy and its implications for fixed interest, equity and multi-asset portfolios.

Our Macro Research Day last week commenced with presentations by economists from two of New Zealand’s largest banks discussing key drivers of the New Zealand economy. This included business confidence and the potential impact of the Reserve Bank capital requirements which has recently been one focus of our research agenda.

We then reviewed the perspectives from our global research partners bringing about significant discussion and debate. The sharp end of the day was a survey of Harbour’s investment team on the outlook for key economic variables and asset classes over the next 12 months.

The key messages from our most recent macro research day are set out below:   

  1. New Zealand GDP growth: Our economy has slowed in recent quarters to a GDP growth rate of 2.3% reflecting a range of factors including capacity pressures, moderating house price growth (falling in Auckland), soft business confidence and a slowing global economy. We see the economy continuing to operate at a growth rate of between 2 – 2.5% given continuing support from strong terms of trade and planned government spending.
  2. New Zealand’s Official Cash Rate: Monetary policy is already very accommodative and has been a factor behind the strong labour market and rising inflation. Core inflation is gradually rising, and firms look likely to face ongoing cost pressures, particularly for wages, while skill shortages and increases in the minimum wage continue. New Zealand is also operating at full employment. The financial markets are close to treating rate cuts as a done deal, but we would not go further than the RBNZ’s line that “the more likely direction … is down.”
  3. Global interest rates: We expect long term global interest rates to grind modestly higher. The US Federal Reserve remains on pause until the cross-currents of slowing global growth, market volatility and “tightened” financial conditions pass. Improving data out of the US does not paint the picture of an economy in need of rate cuts. The recent pick up in Chinese data is also supportive of rising global demand, which may feed through to better momentum in Europe.
  4. New Zealand equities: The New Zealand share market looks expensive on many fronts including on a forward price-to-earnings ratio and dividend yield basis. However, aggregate valuation measures hide the fact that defensive yield stocks have driven the market higher as investors have sought these stocks to provide yield given low interest rate expectations. The recent rally has left these stocks, which typically have low single digit earnings growth, at valuation levels similar to growth companies with double digit earnings growth.
    Source: Harbour, UBS, Bloomberg. March 2019
  5. Global equities: We have a positive outlook for global equity returns over the next 12 months. Monetary policy has remained accommodative and is slowing but the risk of a global recession is over-played. The global economy is still growing, and this environment typically provides a reasonable backdrop for equity market returns. In addition, there remains an attractive equity risk premium in place. Global equity valuations could rise if tail risks such as trade wars and Brexit subside. In the near term there is potential for volatility as the softer economic patch and government shutdown makes its way through US company earnings.

This Harbour Navigator is provided for general information purposes only. The information is given in good faith and has been prepared from published information and other sources believed to be reliable, accurate and complete at the time of preparation but its accuracy and completeness is not guaranteed. Information and any analysis, opinions or views contained herein reflect a judgement at the date of publication and are subject to change without notice. To the extent that any such information, analysis, opinions or views constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised advice under the Financial Advisers Act 2008, nor do they constitute  advice of a legal, tax, accounting or other nature to any persons. Investment in funds managed by Harbour Asset Management Limited can only be made using the Investment Statement, which should be read carefully before an investment decision is made. The price, value and income derived from investments may fluctuate in that values can go down as well as up and investors may get back less than originally invested. Where an investment is denominated in a foreign currency, changes in rates of exchange may have an adverse effect on the value, price or income of the investment. Reference to taxation or the impact of taxation does not constitute tax advice. The rules on and bases of taxation can change. The value of any tax reliefs will depend on your circumstances. You should consult your tax adviser in order to understand the impact of investment decisions on your tax position. No person guarantees repayment of any capital or payment of any returns on capital invested in the funds. Actual performance will be affected by fund charges. Past performance is not indicative of future results, and no representation or warranty, express or implied, is made regarding future performance. To the maximum extent permitted by law, no liability or responsibility is accepted for any loss or damage, direct or consequential, arising from or in connection with this presentation or its contents.