Slowing but still growing
Key points
- Share markets continued their new year rally, aided by positive noises from trade negotiations and further dovish rhetoric from the US Federal Reserve (the Fed)
- Economic data released during the month continue to portray lower economic activity, especially in Europe and China, though China has looked to combat this through a range of stimulatory measures
- Domestically, the economic outlook is continuing to soften, though at this point, the transition appears to be from strong to moderate growth, with risks to the downside
Banks: Increased capital requirements to change the landscape
A material lift in bank capital is on the cards.
If implemented it is likely to result in a combination of higher lending rates, lower deposit rates and potentially lower returns on equity.
The landscape of lending markets is also likely to change, with Australian banks becoming more discerning about the volume of lending to low return sectors and we may see the emergence of non-bank lenders.
The proposal by the Reserve Bank o...
Responsible investing extends beyond a green label
Contact Energy has announced its intentions to raise capital via a “green bond”.
A green bond is a debt security that has been verified to be backing assets, or projects, that have positive environmental or climate change benefits.
Green bonds can bring societal benefits by facilitating funding for projects with positive environmental impacts. Just as credit ratings indicate the likelihood of a bond defaulting, the green ...
Three things the Equity Risk Premium is telling us about investment markets
One of the key decisions that investors must make is how much to respectively allocate to equities and bonds. This decision is made in the knowledge that over time equities have generated superior investment returns. Compensation for the additional volatility, the additional return equities earn over bonds is known as the Equity Risk Premium (ERP). The ERP, while persistent over the long term, varies over the short to medium term, with the direction of the variance having broad implications for investment portfolios.
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Harbour Outlook: Fed Pause Party
Global equity markets rebounded strongly in January, led by the S&P 500 which had its strongest January since 1987. The sharp recovery in risk appetite reflected more dovish statements from the US Federal Reserve (the Fed) which is now expected to pause its interest rate hiking cycle until the cross currents of slowing global growth, market volatility and “tightened” financial conditions pass. A better than expected kick off to the US earnings season further whetted investors’ appetite towards risk assets...
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Australian Royal Commission: Final report shakeup
After a year long review the Hayne Royal Commission (RC) into Misconduct in Financial Services has laid out recommendations. This reshaping of the financial services industry has significant implications and received strong political support, ahead of a likely election by 18 May 2019. It is possible that the Labor Party may have a harsher interpretation of potential changes than the RC recommends.
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RBNZ banking rules shaping credit markets
Changes to banking rules are set to have a meaningful impact on New Zealand’s fixed interest market in 2019:
A proposed rule forcing banks to hold more equity capital will make the banking sector more stable, however, it will come with a raft of second-round impacts. Chief among those will be the impact on banks’ willingness to lend. This is what we are watching most closely;
Separately, we may see an explicit preference for ...
New Zealand equity market debt trends
One of the driving factors behind the global financial crisis (GFC) was high levels of company debt. High leverage and lower earnings coverage of interest costs heightened risk in the US equity market. Recently published research by a global investment bank[i] suggests that US company debt levels may be creeping up again. But are we seeing the same thing happen in New Zealand?
Research by Harbour indicates that the median N...
Core NZ inflation pressures, lifting towards 2 percent
This week saw the release of NZ CPI inflation for Q4 2018. While headline annual inflation measure remained below 2%, the details showed core underlying pressures a little stronger than expected and continuing to lift to target. Rather than sparking any immediate change in policy direction, in our view, the CPI release will see the RBNZ continuing to “watch, worry, and wait”.
Leading into the CPI release, the market had been...
Harbour Outlook: Volatility, more of the same
Key pointsVolatility across global financial markets, which had been building since October, picked up sharply in December.
Many countries, including the US and Australia, are experiencing high employment, solid consumer spending, reasonable business investment trends and mild inflation that should result in a reasonable backdrop for the equity market.
The current environment is likely to remain sensitive to any signs that dom...
