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.
Top 10 risks (and opportunities) for 2022
Looking back on 2021 it is interesting to ponder how it will go down in history. Could it be seen as the year that inflation had a momentary resurgence before fading back into the background, or the year that entered us into a new normal? Could it be seen as the year that the 2021 United Nations Climate Change conference (COP26) brought about meaningful climate change mitigation? Could it be seen as the year that sent Chinese stocks into a bear market or the year that provided the buying opportunity of a generation?READ MORE
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.READ MORE
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: Markets balance higher earnings and yields
- Both New Zealand equity and bond market returns bounced back in March with the S&P/NZX 50 index returning 2.7% and the Bloomberg NZ Bond Composite 0+ year Index returning 0.6%.
- Globally vaccine programmes have gained speed, with the US and UK (alongside Israel) leading the way. The European vaccine rollout has been significantly slower, making re-opening difficult for many nations in the area as they battle rising infections.
- Following changes in New Zealand residential property “bright line” tests and tax deductions on investment properties, expectations of New Zealand’s official cash rate (OCR) increasing were pushed out, contributing to lower bond yields, as well as the New Zealand dollar weakening.
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.
Top 10 risks (and opportunities) for 2021 - With video
As we sat down to write the top 10 risks and opportunities this time last year, there was a plethora of things to consider including US/China trade tensions, elections, and global growth. As it transpired, there was only one risk that really mattered, COVID-19. While a key focus of COVID-19 was the speed of the downturn in investment markets, to us, it would be remiss to not focus on the other important aspects. Such as the speed of the fiscal and monetary response, the acceleration we have seen in technological trends and perhaps the most incredible feat, that we have created multiple effective vaccines five times quicker than any other time in history. Necessity really is the mother of invention.READ MORE
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 Market Survey: Cautious optimism
In our inaugural Harbour Market Survey, we asked almost 80 investment consultants, investors, brokers and banks some key market questions. Most respondents felt it was a good time to fix your New Zealand mortgage and that NZDUSD was likely to appreciate over the next three months, but they only marginally favoured adding riskier assets to portfolios – implying some weakening in the recent strong relationship between NZDUSD and risk assets. NZDAUD views were mixed.READ MORE
Harbour Outlook: Stimulus trumps rise in infections
- 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
- 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
- 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.
Panic doesn’t pay: Tips from professional investors
Harbour’s investment team has decades of experience in managing Australasian shares and New Zealand bonds. Whilst over time, investors generally experience favourable market conditions allowing us to generate positive returns, it tends to be the downturns that people remember most. The table below illustrates this, as New Zealand share market returns were positive for around three quarters of the years shown: