Still a large gap in New Zealand output
- The New Zealand economy shrank at the end of last year as the construction sector struggled to find the resources to continue to expand, while retail trade and accommodation activity dropped due to a lack of tourists.
- New Zealand is in a better position than many other economies, but there is still a gap between our potential output and where we are currently tracking, which is acting as a disinflationary force.
- It seems unlikely that the RBNZ will hike rate hikes in the next year; they have many other actions they could take before contemplating interest rate hikes.
- Longer-dated bond yields could be led higher by offshore developments as global growth beats expectations.
Social Spotlight I: Employee Engagement
- Employee engagement, among larger NZX-listed corporates, was assessed through company reports and a survey.
- We found a low level of disclosure on employee engagement scores, turnover and absenteeism with comparability between companies difficult.
- The majority of companies that did disclose showed improvements in their employee engagement scores and turnover, but not absenteeism.
- Sector dispersion is evident with the IT, Communication and Consumer Staples companies showing the greatest improvement in employee engagement survey
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.
When will central banks react to inflation?
- Higher inflation and the prospect of a reduction in central bank support is becoming a concern among financial market participants.
- We think this risk is low given most economies have spare capacity that is keeping unemployment rates higher and inflation lower than central banks desire.
- The ongoing threat of higher inflation and reduced monetary stimulus, however, is likely to lead to choppy trading conditions as investors manage the transition away from the low inflation and falling interest rate environment seen in recent years.
- We hope that the following Q&A gives you an insight into our thought process.
‘Four More Years’
- Rio Tinto and Meridian have today announced an extension to the Tiwai contract through to December 2024.
- The government has not as yet needed to provide any support
- We would expect further announcements on project development with Contact progressing the Tauhara geothermal plant and Meridian developing their Harapaki wind farm.
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 Macro Research Day: Light at the end of the tunnel
- Harbour’s internal Macro Research Day is a chance to hear from external research providers, challenge assumptions and anchor our medium-term view.
- Highly effective COVID-19 vaccines and early rollout are allowing investors to look past the current acceleration in northern hemisphere cases.
- The New Zealand tourism industry is likely to miss international visitors over summer, however the rest of the economy is doing exceptionally well. Perhaps too well in the case of housing where Reserve Bank of New Zealand Loan-to-Value Ratio restrictions are coming to curb high-risk lending.
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.