Harbour Investment Outlook: Waiting game
Key market movements
The MSCI All Country World Index (ACWI) increased 4.5% last month, in New Zealand dollar-unhedged terms. However, the strength was due entirely to NZD weakness with returns in NZD-hedged terms, coming in at -1.1% for October.
Locally, New Zealand equity market returns picked up after a couple of flat months, with the S&P/NZX 50 Gross Index (including imputation credits) increasing 1.7%. The S&P/ASX 200 Ind...
Harbour Investment Outlook: Choppy waters ahead
Key market movements
After a strong first quarter, the MSCI All Country World Index (ACWI) fell in April with a return of ‑2.3% in New Zealand dollar-unhedged (-2.7% in NZD-hedged) terms for the month. Performance was broadly negative from a sector perspective, with only the utilities and energy sectors in the black. Information technology was a standout on the negative side with a -5.6% return.
Locally, market returns for the...
Harbour Outlook: Transition Period for Markets
Key market movements
The MSCI All Country World Index (ACWI) continued its positive run with a 5.4% return in New Zealand dollar-unhedged (4.7% in NZD-hedged) terms for the month. From a sector perspective performance was broadly positive, with utilities the only negative sector at -0.8%. Leading the way was consumer discretionary at 7.8% and information technology at 6.1%.
In contrast local market returns for the month wer...
Harbour Outlook: Bumps in the road on the way to lower rates?
Key market movements
The MSCI All Country World Index (ACWI) started the year off with a 3.5% (1.3%) return in New Zealand dollar-unhedged (hedged) terms for the month. From a sector perspective performance was mixed, with information technology leading the way at 3.2%, followed by communication services at 2.9% and healthcare at 2.2%. On the other side of the ledger materials was the worst-performing sector at -5.4%, whilst u...
Harbour Outlook: Strong finish to the year, but can it continue?
The US Federal Reserve performed an unexpected dovish pivot at its December meeting and markets now anticipate a "soft landing" where inflation returns to 2% without the Fed having to inflict severe economic damage, opening the gates for a flood of cash into equity markets. The so-called ‘Fed pivot’ saw capital markets quickly focus on when and by how much the Fed and other central banks would cut interest rates. After a lower-than-expected core inflation reading capital...
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Harbour Outlook: Inflection Points
Global share markets delivered one of their strongest monthly returns as market expectations moved from a ‘higher for longer’ interest rate environment to a ‘soft-landing’ for the US economy. The fall in long term bond yields was driven by softer economic data, renewed signs of slowing inflation, and a lower-than-expected US Treasury funding requirement. The continued fall in inflation data allowed central bankers to deliver ‘hawkish pause’ (not lifting rates but ready to if inflation re-emerges) type comments during the month. This weak inflation data contributed to markets beginning to price in cuts to official interest rates over 2024. Given the rise in bond yields was the key headwind for equities in prior months, the fall in yields drove a sharp rally in equity markets.
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Harbour Outlook: Economic Crosscurrents
- The MSCI All Country World Index (ACWI) continued its decline, posting a -2.7% loss in New Zealand dollar-hedged terms (and a 0.2% gain in unhedged NZD terms). Despite three consecutive months of negative returns, the 12-month return figure for the index stands at 9.5% in NZD-hedged terms and 10.4% in unhedged terms.
- Returns for the month were similarly weak in local markets, with the S&P/NZX 50 Gross Index (with imputation credits) falling -4.8%, and the S&P/ASX 200 Index falling -3.8% (-2.4% in New Zealand dollar terms).
- Bond indices were also negative over the month. The Bloomberg NZ Bond Composite 0+ Yr Index fell -0.2%, whilst the Bloomberg Global Aggregate Bond Index (hedged to NZD) also dropped -0.7% over the month. This came as the US market saw 10-year government yields increase to 4.9%, a level not seen since 2007, with resilience in US economic data prompting the market to largely unwind an expectation that the Federal Reserve would be cutting rates in 2024.
Harbour Outlook: Higher for longer, but how much longer?
The MSCI All Country World Index (ACWI) declined for the second month in a row, posting a -5.0% return in unhedged New Zealand dollar terms (-3.4% in hedged terms after strengthening in the New Zealand dollar). Returns were similarly weak in local markets, with the S&P/NZX 50 Gross Index (with imputation credits) falling -1.9%, and the S&P/ASX 200 Index falling -2.8% (-4.1% in New Zealand dollar terms).
Globally, weakness was...
Harbour Outlook: Past the winter solstice, but is it spring yet?
Key points
After a string of strong returns for equity markets August saw a retreat. The MSCI All Country World Index (ACWI) returned -2.1% in New Zealand dollar-hedged terms, however weakness in the New Zealand dollar over the month helped the index move 1.6% in New Zealand dollar terms. Closer to home the S&P/NZX 50 Gross index (with imputation credits) fell 4.2%, whilst the S&P/ASX 200 Index fell a more modest -0.7% in AUD...
Harbour Outlook: Inflection points for interest rates and earnings?
Key points
It was another strong month for equities, with the MSCI All Country World Index (ACWI) returning 2.0% in New Zealand dollar terms, and 3.2% in New Zealand dollar-hedged terms. Closer to home the S&P/NZX 50 Gross index (with imputation credits) advanced 1.2%, whilst the S&P/ASX 200 Index added 2.9% in AUD terms (and 2.4% in NZD terms).
Globally, returns were strong across all sectors, with energy leading the way at ...
Harbour Outlook: Is a soft landing really possible?
Key points
It was a strong month for global markets. The MSCI All Country World Index (ACWI) returned 3.5% in New Zealand dollar terms, and 5.4% in New Zealand dollar-hedged terms. Returns were strong across all sectors, with consumer discretionary standing out at 9.9%. There was a general shift towards cyclical sectors with industrials and materials rounding out the top 3.
Australasian markets also rallied, with the S&P/NZX ...
Harbour Outlook: AI: the fourth industrial revolution?
Key points
The conflict between observed inflation and soft lead indicators for economic activity continues to influence interest rates and economic forecasts. While some central banks may pause from raising rates, the overall balance of risks tilts towards tighter financial conditions. Investments with robust fundamentals and manageable debt levels are preferred in this environment.
It was a weak month for Australasian marke...
Harbour Outlook: A volatile month for bond markets, equities follow
Key points
The MSCI All Country World Index returned -5.7% over the month in New Zealand dollar-unhedged terms, and -1.8% over the quarter. Returns for the month were slightly less worse in New Zealand dollar-hedged terms, down -4.7% for December. However, the dollar-hedged returns were up strongly (+7.0%) over the quarter.
The New Zealand equity market (S&P/NZX 50 Gross with imputation) held up well relative to other develop...
Harbour Outlook: Have we hit peak hikes? Earnings risk to come?
Key points
The MSCI All Country World Index returned 0.8% over the month in New Zealand dollar-unhedged terms, and 6.0% in New Zealand dollar-hedged terms.
The New Zealand equity market (S&P/NZX 50 Gross with imputation) finished the month up 1.9%, whilst the Australian equity market (S&P ASX 200) rose 6.6% in Australian dollar terms in the month, and 4.4% in New Zealand dollar terms.
Generally, bond yields fell over the mon...
Harbour Outlook: Inflation constrained
Key points
The MSCI All Country World Index fell -2.0% over the month in New Zealand dollar-unhedged terms, and -9.0% in New Zealand dollar-hedged terms.
The New Zealand equity market (S&P/NZX 50 Gross with imputation) finished the month down -4.6%, whilst the Australian equity market (S&P ASX 200) fell -6.2% in Australian dollar terms in the month, and -4.0% in New Zealand dollar terms.
Bond yields rose over the month with Ne...
Harbour Outlook: Markets still focused on inflation
Key points
The MSCI All Country World (global shares) Index fell -1.5% over the month in NZD-unhedged terms, and -2.9% in NZD-hedged terms.
The New Zealand equity market (S&P/NZX 50 Gross with imputation) finished the month up 0.9%, whilst the Australian equity market (S&P ASX 200) rose 1.2% in AUD terms in the month, and 1.8% in NZD terms.
Bond yields rose over the month with New Zealand 10-year government bond yields ending...
Harbour Outlook: Quality growth through a turning point?
Key points
The MSCI All Country World (global shares) Index rose 6.1% over the month in NZD-unhedged terms, and 7.1% in NZD-hedged terms.
The New Zealand equity market (S&P/NZX 50 Gross with imputation) finished the month up 5.7%, whilst the Australian equity market (S&P ASX 200) rose 5.7% in AUD terms in the month, and 6.3% in NZD terms.
Bond yields declined over the month with New Zealand 10-year government bond yields e...
Harbour Outlook: From stagflation to low growth?
Key points
The MSCI All Country World (global shares) Index fell -4.1% over the month in NZD-unhedged terms, and -7.7% in NZD-hedged terms. The index ended the quarter -5.7% in NZD-unhedged and -14.3% in NZD-hedged terms.
The New Zealand equity market (S&P/NZX 50 Gross with imputation) finished the month down -3.9% (-10.3% for the quarter), whilst the Australian equity market (S&P ASX 200) fell -8.8% in AUD terms in the mon...
Harbour Outlook: Cycling at warp speed … recession priced in?
Key points
The MSCI All Country World (global shares) Index fell -0.2% over the month in both NZD-hedged and -unhedged terms.
The New Zealand equity market (S&P/NZX 50 Gross with imputation) finished the month down -4.8%, whilst the Australian equity market (S&P ASX 200) fell -2.6% in AUD terms (-1.9% in NZD terms).
Bond yields tracked downwards through May with a partial re-tracing through the last week of the month. As a res...
Harbour Outlook: Stagflation risk, real rates & the land(s) down under
- The MSCI All Country World (global shares) Index rose +2.4% in NZD hedged terms in March and, with the New Zealand dollar strengthening in the past month, the same Index fell -0.6% in NZD terms over the month.
- The New Zealand equity market (S&P/NZX 50 Gross with imputation) finished the month up 1.1%, whilst the Australian equity market (S&P ASX 200) rose 6.9% in AUD terms and 7.6% in NZD terms.
- Prompted by shifts towards faster rate hikes from offshore central banks and combined with large mortgage-based hedging flows domestically, market interest rates pushed relentlessly higher through the month, with the New Zealand 10-year Government bond yield ending at 3.2%, an increase of 0.5%.
- Potential easing of the conflict in Europe and a clearer path for US Federal Reserve (Fed) interest rate increases saw equity markets recover through March; while production disruption and Russian sanction constraints contributed to an increase in commodity prices with the price of oil increasing another 7% over the month.
Harbour Outlook: Ukraine invasion heightens already elevated volatility
- The MSCI All Country World (global shares) Index fell -2.5% in NZD hedged terms in February and, with the New Zealand dollar strengthening in the past month, the same Index fell -5.5% in NZD terms over the month.
- The New Zealand equity market (S&P/NZX 50 Gross with imputation) finished the month up 0.75%, whilst the Australian equity market (S&P ASX 200) rose 2.1% in both AUD and NZD terms.
- The Reserve Bank of New Zealand (RBNZ) delivered a hawkish statement along with a 25bp hike to 1.00% in February, retaining the option to move in 50bp increments and revising its OCR forecasts higher than implied by market pricing.
- Russia’s invasion of Ukraine has become a humanitarian disaster. The geopolitical environment is now vastly changed with a wide range of potential outcomes. It has also added further upward pressure to global energy prices and inflation.
Harbour Outlook: Down by the elevator, up by the stairs?
- The MSCI All Country World (global shares) Index fell -4.9% in USD in January, and with the New Zealand dollar weakening in the past month, the same Index fell -0.9% in NZD terms over the month.
- The New Zealand equity market (S&P/NZX 50 Gross with imputation) finished the month down ‑8.8%, whilst the Australian equity market (S&P ASX 200) fell -6.4% over the month (-5.3% in NZ dollar terms).
- The New Zealand 10-year bond yield rose to 2.60% from 2.39% during January, while the US 10‑year bond yield rose from 1.51% to 1.78%. These moves led to global bond indices declining over the period.
- A sharp lift in interest rate expectations and strong inflation prints contributed to a broad ‘risk off’ move in markets. The pricing of high growth stocks was hit hard, albeit hardly any company was spared by the broad market sell-off.
Harbour Outlook: Tricky transition favours stock picking
- The MSCI All Country World (global shares) Index rose 4.0% in USD in December, taking the three-month return to 6.7%. The same Index rose 3.1% in NZD terms over the month, and with the New Zealand dollar weakening in the past quarter, the three-month return in NZD was stronger at 7.5%.
- The New Zealand 10-year bond yield dropped to 2.39% from 2.49% during December, while the US 10‑year bond yield rose from 1.44% to 1.51%. The move in New Zealand yields contributed to positive performance across domestic bond indices, whilst global indices fell.
- Interest rate yield curves flattened over December as central banks globally (the Reserve Bank of Australia being the laggard) acknowledged inflation may be more than transitory and began lifting official rates. At the same time, ongoing shortages and maturing of the economic recovery contributed to the global equity market earnings revision upgrade ratio slowing, to be only slightly positive. This lift in rates and slowing earnings revisions is likely to contribute to a lift in equity market volatility.
Harbour Outlook: Push and pull factors dictate equity returns
- The MSCI All Country World (global shares) Index fell -2.5% in USD in November, taking the 3-month return to -2.0%. Returns in NZD were positive due to a weakening domestic currency, delivering 2.9% in November whilst the 3-month return was 2.0%.
- Global equity markets fell materially on the combination of Omicron COVID variant headlines, the challenges of northern hemisphere lockdowns and the likely upward trajectory of interest rates following strong inflation data.
- While the Reserve Bank of New Zealand (RBNZ) raised the official cash rate (OCR) by 0.25%, their accompanying commentary was more balanced, reducing the risk of aggressive monetary policy tightening.
- Globally bond yields fell on news of the Omicron variant; the New Zealand 10-year bond yield drew back to 2.48% from 2.63%, while the US 10-year bond yield fell from 1.55% to 1.44%. This contributed to positive performance across bond indices.
Harbour Outlook: Earnings surprises support equity returns
- The MSCI All Country World (global shares) Index rose 5.0% in USD in October, lifting the 3-month return to +2.9%. Returns in NZD were more modest, up 1.3% for the month and 0.7% over the past three months.
- October brought a strong earnings season in the US. At the time of writing, 440 companies in the S&P 500 had reported results with 360 companies (82%) beating earnings estimates, compared to a long-run quarterly average of 66% since 1994.
- An emerging trend is that companies with pricing power that have been able to weather supply side constraints have been able to significantly grow profits, beating expectations. We think this trend will selectively continue.
- Bond yields continued to rise through October; the New Zealand 10-year bond yield increased sharply by 0.54% to 2.63%, while the US 10-year bond yield climbed a more modest 0.06% to 1.55%. This contributed to declines for major New Zealand and global bond indices.
Harbour Outlook: Markets face a wall of worry
- The MSCI All Country World (global shares) Index fell 4.3% (in USD) in September, though was down a more modest 1.4% over the quarter.
- The news that one of China’s largest property developers, Evergrande, was facing imminent default caused jitters within the market, with many worried about potential contagion. Evergrande’s troubles came to the forefront following tighter restrictions on property developers’ balance sheets.
- Broader Chinese economic momentum has continued to stall with Beijing prioritising structural reforms over growth.
- Bond yields rose over the month, the New Zealand 10-year bond yield increased by 0.27% to 2.09%, while the US 10-year bond yield climbed 0.18% to 1.49%. This contributed to declines for major New Zealand and global bond indices.
Harbour Outlook: Delta fails to dampen equity markets
- The MSCI All Country World (global shares) Index rose 2.4% (in USD) in August, buoyed by positive earnings momentum and a more dovish than expected US Federal Reserve.
- The New Zealand earnings season was strong with beats outnumbering misses 2 to 1. This helped drive a strong 5% return for the S&P/NZX 50 index over the month.
- Chinese economic momentum looks to have stalled in recent months. Both Caixin and broader PMIs missed consensus estimates during the month, with the non-manufacturing side of the economy particularly weak.
- The outbreak of COVID-19 in the community scuppered the Reserve Bank of New Zealand’s (RBNZ) plans of a rate rise in August. The tone of the RBNZ remains hawkish which saw bond yields rise across all maturities during August. This caused market returns to be negative with the Bloomberg NZ Bond Composite 0+Yr Index returning -1.0% over the month.
Harbour Outlook: Economic strength brings RBNZ into play
- The MSCI All Country World (global shares) Index rose 0.6% (in USD) in June. The Australian market gained 1.1% (in AUD) while the New Zealand market fell 0.5% over the month.
- The US Earnings season has been strong with, at the time of writing, 443 companies reporting earnings and 377 companies (85%) delivering earnings above consensus expectations.
- Concerns around the COVID-19 delta variant and associated mobility restrictions has contributed to some forecasters reducing global growth expectations.
- In contrast, the strength of the New Zealand economy has seen the Reserve Bank of New Zealand (RBNZ) signal imminent rate hikes, seeing rates out to five years increase over the month.
Harbour Outlook: Expansion accelerates taper talk
- The MSCI All Country World (global shares) Index rose 1.2% (in USD) in June. New Zealand and Australian shares (in AUD) also performed strongly, returning 2.8% and 2.3%.
- Bonds delivered a small gain, with the Bloomberg NZ Bond Composite 0+Yr Index returning 0.12% in June. The fall in 10-year government bond yields in New Zealand was muted (falling just 0.03%) relative to the US, who saw their 10-year Treasury yield fall 0.13% over the month. Globally yield curves flattened in June.
- The market has sided with policy makers in deciding that inflation is transitory, for now. US headline inflation is currently 5% year on year, surveys suggest prices paid by firms are at historic highs and consumer inflation expectations have started to increase.
Harbour Investment Perspectives: Into an expansion
We are six months into the calendar year and investors have enjoyed resilient markets in the first half of 2021; a continuation of the strong recovery from the immediate Covid-19 impacted crisis. Andrew Bascand, our Managing Director, has penned this letter to clients framing the current environment, thanking our stakeholders for their support, and providing some thinking about the period ahead of us.
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Harbour Outlook: Markets ponder higher inflation
- Global equity markets delivered strong returns in May, up 1.6% in US dollars. Cyclical stocks continued to outperform, helping lift the Australian market by 2.3%. New Zealand shares underperformed, down 3.2% over the month.
- Bonds delivered a negative return, with the Bloomberg NZ Bond Composite Index down -0.7%.
- US economic data have been mixed over the past month and should benefit over the coming year as consumers spend a portion of the US$1.8trn of excess savings built up since COVID-19. US job growth unexpectedly moderated in April and the unemployment rate increased. CPI inflation was surprisingly high at 4.2% year on year.
Harbour Outlook: Better earnings, falling yields see equity markets higher
- The New Zealand equity market (S&P/NZX 50 Gross with imputation) finished the month up 1.4%. The Australian equity market (S&P ASX 200) outperformed, rising 3.5% for the month (2.2% in NZD). The performance of global equities was also strong with the MSCI All Country World Index up 4.2% (+1.9% in NZD).
- Bonds generated a positive return, with the Bloomberg NZ Bond Composite Index up 0.7%.
- The US Earnings Season delivered strong results. At the time of writing 438 companies have reported, with 380 beating consensus earnings expectations.
- Vaccinations have gathered speed in the US and Europe; 45% of people in the US and 25% in large euro area countries have received at least one vaccine dose. The New Zealand vaccination programme has started and is expected to ramp up significantly in coming months. We will be watchful for key milestones.
Harbour Outlook: Yields increase accelerating rotation
- Both nominal and real bond yields increased sharply over the month. This saw interest rate sensitive stocks, such as the gentailers in New Zealand and long duration growth stocks give back some performance. Cyclical stocks that would benefit from stronger growth outperformed.
- US earnings season was strong, with 77% of companies either in-line or beating earnings expectations. Our observation, both domestically and offshore, is that the earnings outlook is cautious, reflecting COVID-19 uncertainty, and wary as to the impact of declining government support packages and the on /off impact of lockdowns. In our view, this leaves room for earnings upside.
- The US economy is likely to grow by as much as 7% this year, assisted by a larger-than-expected US$1.9 trn (9% of GDP) stimulus package.
- New Zealand’s economic strength, coupled with a stronger global economic picture, has led to a marked change in interest rate expectations. Market pricing now expects an OCR hike in the middle of 2022. This is a far cry from the negative rates that were priced into markets late last year.
Harbour Outlook: Choppy markets…but with earnings upside
- The COVID-19 vaccine rollout gathered steam during January. Israel, who has given the initial jab to a third of its population, is showing positive early signs. The vaccine rollout has not been as smooth in all jurisdictions, with Europe and the US especially encountering teething issues.
- The US earnings season has shown broad-based strength. At the time of writing, 277 of companies in the S&P 500 had reported earnings, with 79% of companies reporting earnings in line or above consensus expectations.
- New Zealand economic data continued to beat conservative consensus expectations. Stronger inflation and employment data has seen the market no longer price in future interest rate cuts.
Harbour Outlook: Growth continues to accelerate
- COVID-19 hospitalisations continued to increase globally with new strict lockdowns in the UK. However, countries have moved to fast-track vaccines to manage the pandemic. At the time of writing 24 million doses of COVID-19 vaccines have been administered across 41 countries including 7.7 million in the US and 1.5 million in the UK.
- Just before Christmas, the US approved USD900bn of additional fiscal stimulus (about 4% of GDP), much larger than the USD500bn expected by most analysts after the election resulted in a split Congress.
- The Democrats took control of the US Senate, by winning both seats at the January 5th Georgia runoff, increasing the prospect of large additional fiscal stimulus, increased corporate tax rates and further regulation.
- New Zealand Quarter 3 GDP data confirmed that economic activity has returned to pre-COVID-19 levels, consistent with high frequency activity indicators.
Harbour Outlook: Effective vaccine, better earnings spur on markets
- The US Election delivered a market friendly outcome - victory for Joe Biden and a split Congress. While the split Congress likely means less fiscal stimulus, corporate tax rises also seem unlikely.
- In November, we heard from both Pfizer/BioNTech and Moderna, both of whom used the experimental mRNA technology in formulating a COVID-19 vaccine. Preliminary findings showed the efficacy of these vaccines sat at 95% and 94% respectively. The Oxford University/AstraZeneca vaccine which relies on more traditional science showed solid, but less spectacular, efficacy in initial trials.
- The US earnings season continued strongly in November, with 82% of companies beating consensus earnings estimates. The NZ reporting and AGM season also came in above expectations delivering a continuation of ‘less worse’ results versus conservative expectations.
Harbour Outlook: Elections, COVID waves come to the fore
- At the time of writing, Joe Biden is poised to become the 46th US President of the United States, most likely presiding over a split congress. This likely outcome has broad implications for markets including less fiscal stimulus, decreased prospect of corporate tax hikes and more cohesive foreign policy.
- Second COVID-19 infection waves in Europe have resulted in the reimposition of lockdowns which are likely to have a negative impact on economic activity.
- High frequency New Zealand growth indicators have largely returned to pre-COVID levels since the country reverted to Level 1 in early October. However, the level of activity remains below pre-COVID levels.
- The earnings season in the US painted the picture of a robust earnings recovery. At the time of writing, 417 companies have reported earnings with 84% of companies beating consensus earnings expectations.
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.
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.
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.
Harbour Outlook: Stimulus trumps rise in infections
Key points
- Equities continued to bounce back with the S&P/NZX 50 Index returning 5.3%, S&P/ASX 200 Index (in AUD) up 2.6% and the MSCI ACWI Index up 3.0%.
- US employment growth has continued to surprise to the upside, with the improving economic data providing a stark contrast to the worsening COVID case numbers.
- Global COVID-19 containment measures have eased in aggregate, allowing a partial recovery in economic activity. The average lockdown stringency for the world’s 10 largest economies, based on the Oxford University measure, reduced to 60 from 70 in May (where 100 is equivalent to Alert Level 4 and 0 is no restrictions).
- In New Zealand, higher frequency economic indicators are showing a sharp recovery in many sectors.
Harbour Outlook: Beating expectations
Key points
- Equities continued to bounce back with the S&P/NZX 50 returning 3.3%, S&P/ASX 200 (in AUD) up 4.4% and the MSCI ACWI Index up 4.1%.
- Government bond yields settled in a low range, as the Reserve Bank’s bond buying (QE) programme offset the pressure that would otherwise have come from increased issuance.
- Australian and New Zealand earnings season so far, on balance, has delivered more upside than downside surprises relative to expectations.
- Budget 2020 in New Zealand overwhelmed on spending but underwhelmed on detail.
Harbour Outlook: Bounce back
Key points
- COVID-19 infection rates have slowed in most countries with some positive news on potential treatments and the fatality of the virus.
- Equities bounced back strongly digesting positive COVID-19 news flow alongside large scale monetary and fiscal stimulus.
- US earnings season has kicked off with the results to date above expectations, albeit earnings expectations have fallen in recent weeks. Technology and healthcare companies have led the way.
- The action of central banks saw interest rates fall over the month. They are likely to remain low for some time.
Harbour Outlook: At Home
Key points
- COVID-19 continues to spread globally with cases recently reaching over 1 million.
- Governments and central banks’ stimulus measures are helping mitigate the impacts of a sudden stop in economic activity.
- Equities posted losses as investors digested the impact of reduced economic activity on company profits, while bond yields in many countries rose as investors baulked at the large increase in bond supply which is required to fund expanding government deficits globally.
- Russia’s refusal in early March to back an OPEC production cut resulted in Saudi Arabia dramatically increasing supply to “punish” the country. Combined with reduced global demand, oil prices have fallen more than 50% year to date.
Harbour Outlook: Short term uncertainty reigns
Key points
- The spread of COVID-19 outside of China dented sentiment during February, causing global interest rates and equity prices to fall sharply.
- US political risk was elevated during the month, as polling and early primary results saw Bernie Sanders emerge as the frontrunner in the race to become the Democratic candidate for the US Presidency. He since has dropped to a clear second favourite, behind Joe Biden. Sanders is not considered a “market friendly” candidate due to his views on (anti) trade, plans to break up big tech and unconventional views on monetary policy.
- The US earnings season saw 491 companies report. 359 companies (73%) delivered earnings in excess of consensus estimates, with the best performing sectors being technology where 94% of companies beat expectations. The sectors which performed poorest were telecommunications (50% beat rate), and oil and gas (44% beat rate).
- In New Zealand, the December company reporting season was weaker than expected with more misses against expectations in results, versus beats. Company outlook statements were cautious. Consensus earnings forecast downgrades exceeded upgrades.
Harbour Outlook: Coronavirus contagion uncertainty
Key points
- The conflict between the US and Iran caused some market volatility but proved to be short lived.
- Activity indicators were generally stronger in January. US manufacturing, which had been an area of weakness, posted a strong print in early February, well above expectations.
- The US earnings season was very strong. At the time of writing, 320 S&P 500 companies have reported with 238 (74%) of those companies beating consensus earnings expectations.
- The outbreak of Novel Coronavirus (2019-nCov), a relatively less deadly but more contagious coronavirus than SARS, will have an impact on global economic activity due to cities being in lockdown and supply chains being disrupted.
- Interest rates and commodity prices have dropped substantially in response to the coronavirus outbreak. Equities, however, appear to have been supported by strong earnings and greater emphasis on the prior uptick in economic activity.
Harbour Outlook: Downside risks reduced
Key points
- Risks of an escalation in trade conflict and a disorderly Brexit subsided in December, boosting equity markets further. The improved sentiment was somewhat dampened by rising geopolitical uncertainty in the Middle East.
- Activity indicators were stronger in December, with a further recovery in New Zealand confidence. The US manufacturing sector remains the fly in the ointment.
- Generally improving economic indicators and the reduction of tail risks saw bond yields rise over the quarter, meaning negative returns for fixed interest investments.
- Domestically, the Government confirmed additional capital expenditure ($12bn over the 5-year forecast period) that should provide further support to economic activity. The Government forecasts that the package will add 1.4% to GDP.
Harbour Outlook: Earnings deliver, trade fears fade
Key points
Equity markets rallied on the back of positive trade developments, better than expected earnings and improved activity indicators.
The New Zealand market performed strongly on the back of a strong AGM and reporting season. Notably, the more defensive stocks which have outperformed in 2019 delivered weaker returns due to an increase in interest rate expectations.
Lead economic indicators have improved, but it is too ...
Harbour Outlook: Risks reduced but not removed
Key points
- Global equities outperformed bonds in October as trade risks abated, US earnings impressed and central bank easing supported sentiment.
- The economic outlook for Australasia improved and the associated higher interest rates reduced the value of fixed income assets. Equities underperformed their global counterparts due to sectoral weakness in electricity, banking and materials stocks.
- We retain a degree of scepticism in the macro outlook. The global backdrop has improved but remains fragile. Domestically, large amounts of monetary stimulus have been delivered but confidence is poor and activity soft.
- This environment should favour growth stocks where Harbour equity portfolio exposure is concentrated alongside maintaining exposure to several defensive investments. Within fixed interest portfolios, we reduced duration in October but remain long relative to benchmark given soft economic activity and residual risk.
Harbour Outlook: Deteriorating Data
Key points
- Trade developments continued to whipsaw markets during September. The optimism instigated from a planned resumption in trade talks was soon dampened after a planned visit to US farms by Chinese officials was cancelled. Sentiment recovered later in September in anticipation of October’s round of negotiations.
- Global economic data generally came in weaker than expected during September, though some Chinese data did buck the trend of weak data prints.
- Domestically business confidence surveys have continued to weaken. NZIER’s Quarterly Survey of Business Opinion (QSBO) showed a decline in firms’ own trading activity with a net 11% of businesses reporting demand fell over the quarter, the weakest level since September 2010.
Harbour Outlook: Downside risks
Lead economic indicators continued to weaken and uncertainty around trade negotiations dragged on during September. It was against this uncertain backdrop that global equity markets fell 2.0% (in local currency). New Zealand equities held up comparatively well, down -0.9%, with higher yielding companies faring best after the RBNZ’s surprised 50bp cut to interest rates. Australia suffered the brunt of falling commodity prices, down 2.4% (in AUD)...
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Harbour Outlook: Lower and lower domestic interest rates
Key pointsThe trade tensions roller coaster continued during July. Hopes were initially raised with the announcement of further trade talks in China, though that hope turned quickly to despair as Trump announced further tariffs on Chinese imports.
The US Federal Reserve delivered its much-anticipated rate cut in July, just eight months after its last hike. The Fed’s view that this is a “midcycle adjustment to policy” disappoin...
Harbour Outlook: Finely balanced, markets walking a tightrope
Key points Trade tensions again dominated the headlines during June, while the “truce” reached at G20 summit mitigated some left-tail event fears, there is plenty yet to play out and the outcomes are likely to be non-binary.
Trade tensions and a string of softer than expected economic data led global yields lower in June.
In line with the global trend, domestic data erred on the side of disappointing with low PMI and busines...
Harbour Outlook: Trade tensions impact global growth
Global equity markets retraced from their highs in May with the MSCI World index (in local currency) returning -6.0%. Risk aversion picked up almost entirely due to the breakdown in trade talks between the US and China. This resulted in the US increasing tariffs on US$200 billion of Chinese goods; China promptly retaliated.
New Zealand and Australian equities weathered the volatility in global markets well...
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Harbour Outlook: More bright spots emerge
Global equity markets continued to strengthen in April with the MSCI World index (in local currency) returning 3.8%. Markets were buoyed by the trifecta of a strong US earnings season, signs that Chinese stimulus have had a positive economic impact and, perhaps not unrelated, eurozone growth rates coming in above expectations...
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Harbour Outlook: Records broken
Global equity markets continued to strengthen in March with the MSCI World index (in local currency) returning 1.6%, bringing the return for the quarter to 12.6%. Markets were buoyed by a dovish statement from the Fed, whose “patient” approach is unlikely to see any rate rises for some time. A “great” trade deal has been touted between the US and China, which has breathed further life into investment markets...
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Slowing but still growing
Key points
- Share markets continued their new year rally, aided by positive noises from trade negotiations and further dovish rhetoric from the US Federal Reserve (the Fed)
- Economic data released during the month continue to portray lower economic activity, especially in Europe and China, though China has looked to combat this through a range of stimulatory measures
- Domestically, the economic outlook is continuing to soften, though at this point, the transition appears to be from strong to moderate growth, with risks to the downside
Harbour Outlook: Fed Pause Party
Global equity markets rebounded strongly in January, led by the S&P 500 which had its strongest January since 1987. The sharp recovery in risk appetite reflected more dovish statements from the US Federal Reserve (the Fed) which is now expected to pause its interest rate hiking cycle until the cross currents of slowing global growth, market volatility and “tightened” financial conditions pass. A better than expected kick off to the US earnings season further whetted investors’ appetite towards risk assets...
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Harbour Outlook: Volatility, more of the same
Key pointsVolatility across global financial markets, which had been building since October, picked up sharply in December.
Many countries, including the US and Australia, are experiencing high employment, solid consumer spending, reasonable business investment trends and mild inflation that should result in a reasonable backdrop for the equity market.
The current environment is likely to remain sensitive to any signs that dom...
Harbour Outlook - Volatility Strikes Back
Key points
Financial market volatility has increased in recent months but still remains relatively low by historical standards.
While the macroeconomic data continues to point to a strong US economy, we are expecting the US Federal Reserve to be more cautious and data dependent as they approach more neutral interest rate settings.
While US-China tensions are likely to be a source of volatility as news headlines emerge, we exp...
Outlook: Equity Market Pullback
Key developments
For much of the year, the main theme has been global bond yields inching higher as US Federal Reserve continues normalising interest rates; while at the same time equity markets also moved steadily higher, supported by solid global growth. However, finally in October equity markets experienced a noticeable and widespread pullback.
Chart 1. Equity market levels since the beginning of 2018
The New Zealand eq...
Outlook: Low Local Interest Rates
Key developments
In September we saw a continuation of the theme of low local interest rates in New Zealand, in a broader global environment where bond yields overseas have crept higher. This provided support for the local fixed interest and equity markets, while the NZ dollar remained at its recent low levels.
The tone in global markets has remained relatively cautious, with worries about trade tensions, pockets of strain ...
Harbour Outlook: Crisis of confidence
It was a strong month for absolute returns in New Zealand asset classes in August, with the NZX50 sharemarket index rising around 4.4% and the NZ Government bond index generating a return above 1.2%. This strong performance of financial markets sat in sharp contrast to the continued weakness of New Zealand business confidence, which is shaping the political and policy-making environment.
As usual there was a laundry list of global developments highlighting the ongoing risks to the global backdrop: heightened US trade tensions, this time with Canada; wobbles in the Italian banking sector and sovereign bond market; emerging market strains in Turkey and Argentina; and political changes in Australia generating the 5th prime minister in five years. Despite these developments and headlines, global macroeconomic data, particularly in the United States, continued to show a picture of solid actual economic activity running near economists’ expectations...
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Harbour Outlook: Slowing growth and rising inflation
Key developments
In recent months, we have highlighted how the New Zealand economy and markets seem at a crossroads, with a moderation in domestic economic activity whilst cost pressures appear to be rising. With further evidence of this scenario playing out in July, we look into the implications for the rates market through monetary and fiscal policy, as well as the impact on New Zealand equity valuations.
But first, looki...
Harbour Outlook - Activity moderating and costs rising
Key developments
In recent months we have highlighted how economies and markets seem at a crossroads. In June, there was further evidence of an upcoming moderation in domestic economic activity whilst cost pressures appear to be rising. Looking forward, this is a theme that remains near the top of our list of what to watch most closely on the horizon.
Looking back over June, while some macroeconomic data in Europe and Asia ...
Harbour Outlook: Crossroads
A common theme which came through during May was economies and markets being at crossroads. Globally, the US continued to generate solid economic data, while in Europe political tensions rose. Domestically, solid economic activity masked a growing divergence by type of activity. Equally, subdued near-term inflation pressures concealed the prospect of an uplift in some medium-term inflation drivers.
Bond yields fell over the month. Economic data in the US is continuing to print at very robust levels and markets are placing an 80% chance on the US Federal Reserve delivering another hike at their upcoming June meeting. However, this was more than offset during May by a flight to safety prompted by the failure of leading Italian political parties to form a government, heightened by the very high level of Italian Government debt and concerns that the Italians may wish to redefine aspects of their Eurozone membership. While Italian 2-year yields initially spiked as the market priced an additional risk premium, yields in other developed markets like the US, Australia and NZ fell given their relative safety...
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Harbour Outlook: Moving into the political season
The Harbour Outlook summarises recent market developments, what we are monitoring closely, and our key views on the outlook for fixed interest, credit and equity markets.
Key developments
Globally, equity markets bounced back in April, with concerns abating from earlier in the year on global inflation risks, trade wars, political threats to the tech sector, and funding pressures. In particular, global markets were comforted...
Trade, tech and funding tensions
Key developments
Globally, equity markets were weak over March, with most overseas markets down between 2-3% over the month.
After experiencing worries about rising inflation and the removal of monetary stimulus in January and February, in March equity investors were rattled by the Trump-led US government’s aggressive approach to trade negotiations and potential increased regulation of the technology sector. In addition, wh...
Rising Volatility
The Harbour Outlook summarises recent market developments, what we are monitoring closely, and our key views on the outlook for fixed interest, credit and equity markets.
Key developments Following on from the same themes in January, markets continued to see strong global economic growth in February, but worried about the top risk on our list for 2018 – namely inflation risk and ultimately concerns about whether monetary sti...
New Year, similar themes
This New Year brings with it a slew of market outlook articles and fresh investment strategies. In adorning the wall with a new Gregorian calendar in 2018, we see only an evolution of current themes
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Nearing an end to the New Zealand Goldilocks?
Markets, both in New Zealand and globally, have experienced goldilocks conditions for the past 5 years of low inflation and solid economic growth. While markets performed strongly in November, there were increasing signs, particularly in New Zealand, that 2018 may involve a transition away from this goldilocks environment.
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Adjusting to Change
Key developments ‘Adjusting to change’ continued to be a key theme driving markets in October, whether it was political change, normalising global interest rates or changing consumer behaviour reflecting disruptive technological changes.
New Zealand had the drama of watching election coalition negotiations unfold, which eventually enabled the Labour Party and New Zealand First to form a government, with supply and confidence ...
Normalising Global Interest Rates
Key DevelopmentsIn September, there were two main local market events in New Zealand which were somewhat overshadowed by the broader theme of normalising global interest rates.
The first was the hard-fought NZ election, which left no clear government formed on election night. Consistent with the last 8 MMP elections in NZ, it will likely take some time for a government to form. This process is not a surprise for local nor in...
Changing Political Landscapes
Key developments In August, against a backdrop of rising geo-political tensions, many Australasian companies announced their half year or full year financial results; the impact of disruptive technologies was evident in many profit announcements.
We caution on reading too much in the aggregate company profit results, as increasingly the divergence in results is becoming obvious. For instance retail, media and telecommunicatio...
Low Inflation and Solid Earnings Growth
Key developments At the end of June, bond and equity markets were briefly rattled by concerns that central banks were readying the market for the removal of stimulus. Comments from the US Federal Reserve, European Central Bank, Bank of England and Bank of Canada had almost seemed co-ordinated, pointing to a shift in focus from the threat of deflation to the prospects of reflation.
Through the course of July, equity markets n...