- 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:
- 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.
- 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.”
- 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.
- 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
- 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.
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