- Our internal Macro Research Day is a chance to re-visit the research that anchors our medium-term view.
- Locally, we expect economic activity to moderate rather than slow sharply, and the RBNZ to remain on hold for a considerable time ahead to provide the best chance for core inflation to lift above 2%.
- Globally, we see interest rates rising, but with monetary policy still supportive for financial markets while global inflation remains relatively low and global growth remains robust.
- Our survey of Harbour investment staff illustrates visually how our macroeconomic views and the implications for asset classes have evolved through time.
In recent years, Harbour’s internal six-monthly Macro Research Day for investment staff has become a key part of our research calendar. It is 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. In a fast-moving world of news headlines and tweets, it is even more important to have an investment view that is anchored in research.
At our Macro Research Day last week, the day commenced with a presentation from Christina Leung, who runs NZIER’s detailed business confidence survey (QSBO). Following sessions led by staff, and the ensuing discussion and debate, the sharp end of the Macro Research Day was a survey of Harbour’s investment staff on the outlook for key macroeconomic variables and asset classes over the next 12 months. This provides not only a snapshot of our medium-term views but also a picture of how these have evolved over time. The key messages from our most recent Macro Research Day undertaken on 12 October are set out below.NZ GDP growth: We expect NZ GDP growth will moderate from the current pace of 2.7%, given the recent softening in net migration, credit growth, housing prices and business confidence. However, our view is that the NZ economy is still likely to deliver at least 2-2.5% growth, given continuing support from strong terms of trade, fiscal stimulus and ongoing monetary stimulus from low interest rates and exchange rates.
Official Cash Rate: We are becoming more confident that the OCR will remain on hold at 1.75% for the next 12 months. While the RBNZ has sent a strong message about their willingness to cut the OCR if required, we believe that relatively solid economic activity and building inflation pressures will keep the OCR on hold until the RBNZ is very confident that the threat from weak business confidence has passed and a range of core inflation measures are at or above 2%. We expect this process to take some time.
Global interest rates: We expect global long-term interest rates to continue rising, as the US Federal Reserve remains on its path of removing monetary stimulus given strong economic activity, low unemployment and the upcoming boost to the economy from fiscal stimulus. Monetary policy in Japan and Europe is also expected to become less accommodating in the period ahead, contributing to some upward pressure on global long-term rates.
Credit conditions: We are cautious about the outlook for credit spreads after a long period of strong performance and in an environment where credit conditions for some borrowers are tightening as lenders become more discerning. But, to be clear, we are in the camp of credit growth moderating to a pace more in line with nominal GDP growth, rather than the camp of predicting a severe credit contraction or sharp widening in credit spreads.
New Zealand equities: After being apprehensive about the valuation of NZ equities for some time – especially defensive and interest-sensitive equities – we now see the outlook skewed more positively over the next 12 months. This partly relates to the backdrop of solid economic growth and low interest rates, and partly to the market correction in recent weeks easing pressure on valuations. We expect the most appealing opportunities to come from growth-orientated and globally-orientated companies. Risks remain, especially from pressure on margins and from government policies that could “crowd out” the private sector opportunities.
Global equities: We continue to have a positive outlook for global and Australian equities. While global debt levels remain high and interest rates are rising, we do not believe this will restrict the outlook for global equities as long as global inflation remains relatively low and global growth remains robust. At this stage, we see the threat of trade wars as a political issue that is likely to have an economic resolution after some brinksmanship that creates market volatility.
NZ dollar: Finally, after taking a bearish view on the NZ dollar for some time, over the next 12 months we see the outlook for the NZ dollar more evenly balanced. This is partly motivated by a view that the NZ dollar is no longer at an expensive valuation after recent falls; and partly due to a cyclical view that there could be a pause in recent US dollar strength, as well as the market scaling back its expectation of the RBNZ cutting the OCR locally.
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Harbour Asset Management Limited is the issuer and manager of the Harbour Investment Funds. Investors must receive and should read carefully the Product Disclosure Statement, available at www.harbourasset.co.nz. We are required to publish quarterly Fund updates showing returns and total fees during the previous year, also available at www.harbourasset.co.nz. Harbour Asset Management Limited also manages wholesale unit trusts. To invest as a Wholesale Investor, investors must fit the criteria as set out in the Financial Markets Conduct Act 2013. This publication is provided in good faith for general information purposes only. Information has been prepared from sources believed to be reliable and accurate at the time of publication, but this is not guaranteed. Information, analysis or views contained herein reflect a judgement at the date of publication and are subject to change without notice. This is not intended to constitute advice to any person. To the extent that any such information, analysis, opinions or views constitutes advice, it does not consider any person’s particular financial situation or goals and, accordingly, does not constitute personalised advice under the Financial Advisers Act 2008. This does not constitute advice of a legal, accounting, tax or other nature to any persons. You should consult your tax adviser in order to understand the impact of investment decisions on your tax position. The price, value and income derived from investments may fluctuate 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. Actual performance will be affected by fund charges as well as the timing of an investor’s cash flows into or out of the Fund. Past performance is not indicative of future results, and no representation or warranty, express or implied, is made regarding future performance. Neither Harbour Asset Management Limited nor any other person guarantees repayment of any capital or any returns on capital invested in the investments. 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 or its contents.