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.
Harbour Investment Perspectives: Into an expansion
We are six months into the calendar year and investors have enjoyed resilient markets in the first half of 2021; a continuation of the strong recovery from the immediate Covid-19 impacted crisis. Andrew Bascand, our Managing Director, has penned this letter to clients framing the current environment, thanking our stakeholders for their support, and providing some thinking about the period ahead of us.
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Back to Core Banking
A virtual tour through Australian banking issues
- More tailwinds for the banking sector
- Medium term, the banking sector faces pressure to continue to invest heavily in their digital consumer platforms
- Differentiated strategies are appearing as banks rebuild their client focus
Accelerating down the sustainability road(map)
- The inaugural Australasian sustainability-linked bond was issued by Wesfarmers last week
- Sustainability-linked borrowing links a company’s interest payments to measurable sustainability targets
- Missing the targets would result in tangibly higher interest costs
Harbour’s Environmental, Social and Governance policy
Harbour’s Environmental, Social and Governance (ESG) policy encompasses our approach to responsible investing including integration into our investment decision making process, stewardship practices and industry engagement. This policy has now been updated to reflect our constantly evolving approach with key developments such as a new section on sustainability outcomes, our guiding principles on proxy voting and further explanation of our exclusions process.
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Today's Climate Change Commission release
The key changes from the draft report to the Government are:
- Historic emissions have been revised up – we are at a tougher starting point
- Lower uptake of electric vehicles forecasted
- Revisions lower the estimates of primary sector herd reductions
- Increased ambitions on waste
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.
It’s not easy being green
- The Climate Change Commission’s final advice to the Government is due to be released next Wednesday. This follows a review of interested party submissions and feedback from the initial draft report.
- We do not see the key draft recommendations changing, but at the margin we might see some alterations to the Commission’s recommendations.
Are retail interest rates about to rise?
- Despite substantial increases in wholesale interest rates over the past 6 months, retail rates have mostly declined as the Reserve Bank of New Zealand has kept the Official Cash Rate unchanged and offered cheap bank funding through its Funding for Lending Programme.
- The Reserve Bank of New Zealand is now more confident in the economic outlook and forecasts a larger amount of interest rate hikes than markets currently expect, beginning in Q3 next year.
- As financial markets price the prospect of earlier and more rate hikes, increasing banks’ wholesale funding costs, retail interest rates are likely to rise, starting with 2-year and longer mortgage rates over coming months, while meaningful increases in term deposit rates may happen later and be more gradual.
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
