CIP INVESTMENT MARKET COMMENTARY
Prepared by Peter Collerton, Capital Investment Planning Ltd
June was a time for many to conclude that all was not well in the world, in an economic sense, and stock markets fell accordingly. The US S&P 500 was down -8.6% for the month and is now down -4.9% for 1 year. The UK FTSE100 is moving in line with the S&P 500, down -14.9% over 1 year also. Europe is faring worse with the French CAC 40 down-11.6% in June and -26.8% for 1 year.
Closer to home the ASX All Ords was down -7.6% in June and -17.0% over 1 year. The NZSE 50 has fared worse and was down -11.9% in June and -24.6% over 1 year.
The NZD fell against all currencies over the last month as interest rate cuts appear to be getting closer.
Figures from NZ Statistics are indicating we may be in a recession. The GDP figures for the March quarter showed that economic activity decreased -0.3% in the March 2008 quarter. If the June figures are also negative, giving two consecutive negative quarters, this will confirm suspicions that NZ is in a recession. Annual growth in Gross Domestic Product is sitting at 3.0% for the year ending March 2008.
Primary industries activity decreased 4.1% (mainly due to the summer drought), and goods-producing industries declined 1.9% in the March 2008 quarter.
Household consumption expenditure dropped 0.4%, following an increase of 0.5% last quarter.
NZ inflation remains high at 3.4% YoY and forecasts appear to be for a peak in the range of 4.0% to 4.7% in late 2008. A year ago New Zealand’s CPI was 2.5% but we now have higher food prices, transport costs have escalated and mortgage rates are up due to global credit shortages. Inflation is then expected to return to below targeted 3.0% by 2010.
The NZIER published its Quarterly Survey of Business Opinion in early July and titled it “Stagflation underway”. Stagflation occurs when the economy isn't growing (which will normally mean unemployment is rising) but prices are rising. This is not a good situation for a country to be in.
On a seasonally adjusted basis, the survey showed a net 18% of firms reported a decline in their own activity and a net 18% expect their trading activity to fall in the next three months. These figures are at their most negative since June 1998 and December 1982, respectively. The movements in the trading activity indicators reflect the movements in real Gross Domestic Product (GDP) closely over time.
The RBNZ left the cash rate at 8.25% on the 5th of June though indicated easing may be sooner than previously thought. Some commentators are speculating that the OCR may begin its downwards journey this month. The consensus is for a first cut in September and around a 1.0% cut by this time next year.
The reason relief may not be in sight for homeowners immediately is financing costs for our banks are still high due to the global credit crisis. They are also facing higher levels of bad debts, although until results are released, it is unknown to what level. They therefore may not be able to pass on any reduction in the OCR immediately and may lag the Reserve bank to keep margins healthy.
The only definite positive is that export markets could pick up as exchange rates come back from their highs as interest rates fall. Of course this will be difficult with a lot of the world feeling the economic blues. Who is going to increase imports?
GLOBAL ECONOMY - DECOUPLING. DOES IT EXIST?
Decoupling is an effect of globalisation. The theory is that when the USA economy declines the rest of the world won’t suffer like it did in the past because other markets will remain robust and the global economy will continue unabated. Most evidence now is starting to show that globalisation of markets is not complete and when America “sneezes” we all still “catch the cold”.
The effects have been magnified by the global credit crunch and credit bubbles existing in markets other than the USA. The credit bubbles have truly burst in the UK and New Zealand, and look as though they have in Australia as well.
In the past month, most Asian countries have revised their GDP growth estimates down rapidly. They are also increasing their CPI estimates.
Singapore has just reported the largest slowdown in GDP for 5 years with a 6.6% annualised rate reduction. Growth estimates for the year are now in the 4-6% range down from 7.7% last year. Taiwan’s GDP forecasts have been reduced from 5.2% to 4.5% for this year. A Reuters poll has found that economists are forecasting slower Gross Domestic Product growth this year in 11 of the 12 economies in the Asia-Pacific region, excluding Japan. The Bank of Korea has raised its 2008 inflation forecast to 4.8 percent from December's prediction of 3.3 percent. The biggest Southeast Asia economy, Indonesia, revised up its inflation target from 6.6 percent to 9.5 percent this year.
WHAT DOES IT ALL MEAN?
It all means that the Global Economy is now slowing and inflation pressures are being felt everywhere. We are all in for a slow growth environment for some time (2-3 years) and inflation is going to hurt disposable income. A lot of factors are very different from other recession / stagflation periods so what is going to happen is difficult to predict.
as at 30 June 2008
|
1 Year |
3 Years |
5 Years |
|
Avg % p.a. |
Avg % p.a. |
Avg % p.a. |
| Inflation (Mar 08) |
3.4 |
3.0 |
2.6 |
| GDP real (Dec 07) |
1.9 |
2.3 |
2.9 |
| Housing (Dec 07) |
8.0 |
12.2 |
18.3 |
|
|
|
|
|
| 6 month Deposit |
8.3 |
7.7 |
7.1 |
| 90 -day Bank Bill |
8.8 |
8.2 |
7.6 |
|
|
1 year ago
|
3 years ago
|
5 years ago
|
| NZD/AUD (rate x years ago) 0.7997 |
0.8980 |
0.9242 |
0.8741 |
| NZD/GBP (rate x years ago) 0.3870 |
0.3806 |
0.3895 |
0.3498 |
| NZD/USD (rate x years ago) 0.7607 |
0.7559 |
0.7085 |
0.5809 |
|
|
|
|
| NZD/AUD (% chg) |
12.3 |
15.6 |
9.3 |
| NZD/GBP (% chg) |
-1.7 |
0.6 |
-9.6 |
| NZD/USD (% chg) |
-0.6 |
-6.9 |
-23.6 |
|
% return p.a.
|
% return p.a.
|
% return p.a.
|
| NZSX 50 Gross Index |
-24.6 |
-0.5 |
n/a |
| ASX All Ords Gross Index NZ$ |
-15.5 |
8.7 |
15.6 |
Hang Seng (Hong Kong) |
1.5
|
18.5
|
26.2
|
|
Nikkei 225 (Japan) |
-25.7 |
5.5 |
9.7 |
| SSE Comp (China) |
-28.4 |
51.0 |
16.8 |
| S&P 500 (USA) |
-14.9 |
2.5 |
6.3 |
| FTSE 100 (UK) |
-14.9 |
3.3 |
7.9 |
| GDAX (Germany) |
-19.8 |
13.3 |
19.9 |
| CAC40 (France) |
-26.8 |
1.6 |
8.8 |
| MSCI World Index NZ$ |
-9.3 |
6.8 |
7.6 |
|
|
% change p.a.
|
% change p.a.
|
% change p.a.
|
| Gold |
42.2 |
38.9 |
32.3 |
| Oil |
93.7 |
50.0 |
83.0 |
Prepared by Peter Collerton, Capital Investment Planning Ltd, July 2008
Capital Investment Planning Ltd, P.O. Box 22238, Christchurch, New Zealand
Phone +64 3 379 1913 Fax +64 3 377 2330
Important Note. This publication may be copied in whole or part provided Capital Investment Planning Ltd is acknowledged as the source. Investment and mortgage rates are indicative only and, whilst correct at the time of publication, are subject to change without notice. Text may be opinion only and should not be seen as a substitute for personal professional advice relative to an individual's personal situation.
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