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Harbour Outlook: Election, recovery and vaccine uncertainty

  • Joe Biden is a firming favourite to become the 46th US President. If Biden wins but the Republicans retain the Senate, most analysts predict little aggregate market reaction. At present, this outcome is finely balanced. A Democrat clean sweep is viewed as a less market-friendly outcome.
  • The easiest part of the economic recovery phase now appears to have passed. Investors are more likely to face waves of positive and negative data to anchor views. Economists have widely dispersed views on the near-term outlook for both the New Zealand and Australian economies.
  • Looking forward, announcements from many of the nine current COVID-19 vaccine Phase-3 trials are likely this quarter. Already markets have reacted to both positive and negative news, indicating the strong influence that the results have on uncertainty.
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Harbour Team | Posted on Oct 8, 2020
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The further consequences of lower interest rates

  • As market interest rates in New Zealand decline further, additional consequences are revealing themselves. The theme of accelerating progression of longer-term trends continues.
  • Wholesale interest rates continue to decline, with the Government’s PREFU announcement being the catalyst this week, due to a $10bln reduction in the size of the Government Stock issuance program for the 2020/21 fiscal year. The five-year New Zealand Government bond now trades at a negative yield, joining the one and two year maturities. 35% of outstanding nominal New Zealand Government Stock is now in the “negative rate” club.
  • This week the Auckland Council issued the longest maturity bond in New Zealand for more than fifty years. The ability of a council to issue 30-year bonds in the domestic market is a notable milestone in the ongoing development of the New Zealand capital market.
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Mark Brown
Mark Brown | Posted on Sep 18, 2020
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Negative cash rates – The afterburner for asset prices

  • The RBNZ’s stated preference for a negative OCR, should further stimulus be required, has encouraged the New Zealand market to expect negative wholesale cash interest rates next year
  • This forward guidance on the potential for negative rates has led to large declines in retail interest rates and is having a powerful and positive impact on all asset prices
  • This week a New Zealand government bond closed with a negative yield for the first time
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Hamish Pepper, Andrew Bascand | Posted on Sep 11, 2020
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ESG themes from company reporting season

  • Health and safety are being prioritised in response to COVID-19
  • Companies are broadly improving gender diversity and pay gap disclosure
  • There is a rising alignment with climate change reporting framework
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Jorge Waayman
Jorge Waayman | Posted on Sep 10, 2020
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Harbour Outlook: Beating cautious expectations

  • The world is learning to live with COVID-19 and economies are recovering faster than expected, demonstrated by, in aggregate, better-than-expected economic and earnings data in August.
  • With the US Federal Reserve (the Fed) moving to an average inflation target, the Reserve Bank of New Zealand (RBNZ) confirming it is on the same page as the Fed and the Reserve Bank of Australia stating it "will maintain highly accommodative settings as long as is required”, central bank policy is likely to stay accommodative for longer.
  • The dovish stance from the RBNZ has led to markets pricing the Official Cash Rate (OCR) at -0.20% in a years’ time.
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Harbour Team | Posted on Sep 8, 2020
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Bond market takes note of RBNZ dovish shift

  • We think the RBNZ reaction function has become more dovish with lower and flatter yield curves the primary goal in the face of persistent health-related downside economic risks.
  • The Bank expanded its QE programme by more-than-expected last week from $60bn to $100bn and said it is prepared to implement a negative OCR alongside direct lending to retail banks at interest rates close to the OCR, if required.
  • Interest rates have fallen in response, but NZ government bonds now look expensive versus their global peers and a sharp rise in breakeven inflation rates suggest that economic risks may lie in both directions.
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Hamish Pepper | Posted on Aug 18, 2020
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Shadow banks shine light on mortgage deferrals

  • Some of New Zealand’s non-bank mortgage lenders have provided detailed data that illustrates they appear well-positioned to weather an increase in non-performing loans when COVID-related loan deferrals expire
  • Our various probes into the big banks indicate no cause for alarm, albeit we expect loss provisioning needs to rise and small to medium-sized enterprise (SME) lending trends need to be monitored
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Simon Pannett | Posted on Aug 13, 2020
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Harbour Outlook: Data supports markets

  • Better-than-expected economic data and company earnings have supported risk sentiment over the past month.
  • Continued progress towards a COVID-19 vaccine, alongside ongoing stimulus, has also added to the positive mood, outweighing concern about ongoing mobility restrictions and second waves of COVID-19 infection.
  • The New Zealand economy continues to benefit from ongoing control of COVID-19, low mobility restrictions and policy support. Fiscal stimulus is likely to wane and ongoing border closure means complete recovery is largely contingent on a vaccine.
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Harbour Team | Posted on Aug 10, 2020
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Are we ‘Thinking Big’ Again?

  • Electrification of industrial and process heat makes sense
  • Pumped storage would be a massive project, but could help achieve the Government’s 100% renewable objective
  • Substantial challenges remain in terms of cost, engineering, and resource consenting
  • Scoping study results unlikely to be published quickly with sector uncertainty to remain in the short term
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Craig Stent | Posted on Jul 27, 2020
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ESG & COVID-19 – Did the long term add value in the short term?

  • Whilst Environmental, Social and Governance (ESG) policies take time to impact investment returns, we present evidence that ESG policies added value in the volatile first half of 2020
  • Companies with better ESG credentials fell by less when the market dropped in the first quarter of 2020 and kept up with the market when it rallied in the second quarter of 2020
  • Companies with lower ESG credentials dropped more in the first quarter, recovered less in the second quarter and underperformed the market over the first half of 2020.
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Shane Solly
Shane Solly | Posted on Jul 22, 2020