The Fed can taper without tantrum
- As the US economy continues to improve, the US Federal Reserve (Fed) seems close to reducing its pace of bond purchases as part of its quantitative easing (QE) programme.
- Different to the “taper tantrum” of 2013, however, a reduction in purchases is widely expected and is not being associated with imminent interest rate hikes.
- US Treasury bond returns tend to be mixed prior to interest rate hikes but US equity markets generally fare much better.
- That’s not to say it will necessarily be smooth sailing for financial markets. Risks exist in many directions, but a well broadcast tapering may not be the largest concern.
Keeping the lights on
- Decarbonisation and keeping the lights on will need significant investment
- Investment needs a stable policy environment
- Policy risk may have lessened with reviews targeted at better information sharing
Real Estate Investment Trusts - Quality over quantity?
- Real Estate Investment Trusts (REITs) have delivered an attractive return relative to their lower volatility over the longer term
- The quality of New Zealand property returns has improved over the last 10 years with a higher weighting to industrial assets
- New Zealand REIT dividend distributions are now more sustainable, with most dividends now based on conservative available funds from operations definition rather than accounting definitions
The RBNZ “read the room” with a hawkish hold
- The RBNZ left the OCR unchanged yesterday given heightened health-related uncertainty.
- But with the central bank’s inflation and employment objectives met, the Monetary Policy Committee has a strong desire to reduce stimulus once this uncertainty passes.
- We agree that interest rates eventually need to be a lot higher, but health outcomes will determine when the tightening cycle begins. In fixed income portfolios we are positioned for the OCR to remain on hold while the COVID-19 delta variant outbreak unfolds, but for longer term yields to rise and inflation pressures to persist.
The Delta Blues
- We hope you are all keeping safe & well as we find ourselves back in level 4. We have done this before, and we can do it again!
- As well as the challenges of a snap lockdown, today has been one of the busiest days of the year for both companies reporting and the macro-economic calendar.
- Today the New Zealand equity market bucked the trend from markets overnight with equity prices recovering after strong local company results and AGM updates positively impacting some of our largest companies.
- Fixed income and currency markets, however, were more affected by the COVID-19 outbreak news, with the Reserve Bank of New Zealand (RBNZ) displaying considerable risk awareness in deciding not to proceed with a rate hike today that it was widely expected to make.
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.
Social Spotlight II: Human Capital Management (Including video)
- Health and safety, diversity and inequality are key issues related to the United Nation’s Sustainable Development Goals.
- In our second of three articles following our research project, we summarise our findings on health & safety, gender diversity and income inequality.
- We found a lack of injury frequency disclosures, with less than half the companies in our sample reporting on recordable injuries and lost time metrics.
- Gender diversity across total employees is broadly equal, but there is significant room to improve female representation in senior roles.
- Significant variance exists between sectors on our measure of income inequality.
Sustainability-Linked Bonds: Video
In relation to our recent Harbour Navigator, Manager of ESG Research, Jorge Waayman sits down with Senior Credit Analyst, Simon Pannett to discuss sustainability-linked bonds and what that means.
READ MORE
Mortgage rates rise, but households can manage.
- ASB increased all its fixed mortgage rates yesterday, including the highly popular one year rate by 0.36% to 2.55%. We expect other major banks to follow, likely marking the end of a multi-year decline in New Zealand mortgage rates.
- Many households will soon be exposed to these rates as almost 80% of outstanding mortgages are either floating (12%) or fixed for less than one year (65%).
- Further increases in mortgage rates are likely as the economic expansion supports a removal of monetary policy stimulus and higher bank funding costs.
- We think households in aggregate can manage higher rates. Debt servicing costs are historically low and there is some evidence that mortgage holders are currently paying off a greater proportion of principal, implying a buffer to rising rates.
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.
