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: 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.
REINZ data shines a light
- The housing market holds firm in first read post significant policy changes
- Yesterday’s Real Estate Institute of New Zealand (REINZ) data is the most significant indicator of the housing market since the significant policy changes introduced on 31 March.
- This relatively strong data suggests that it takes both supply and time to cool a housing market
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.
Inflation risks building
- Inflation is likely to surge through the Reserve Bank of New Zealand’s (RBNZ) 2% target in the coming months, reflecting mostly temporary factors that could easily reverse.
- But there is a risk that inflation becomes more persistent, something the market may be underestimating.
- We think medium-term inflation risks are skewed to the upside and have positioned portfolios accordingly.
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: 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.