CIP INVESTMENT MARKET COMMENTARY
Prepared by Peter Collerton, Capital Investment Planning Ltd 

February proved to be a mixed month for equity markets. Asia and the UK were up slightly whilst most other major markets were down by as much as 4.0%. The Australia All Ordinaries was down by 0.39% and NZX 50 was down by 2.4%. Gold and Oil continued to climb with Oil up 11% and Gold up 9%.

New Zealand Economic Outlook

The NZ Reserve Bank released its latest Monetary Policy Statement (MPS) at the beginning of March. It was no surprise that the Official Cash Rate was held at 8.25%.

The MPS contained a lot of negative comment about the general outlook for the New Zealand economy. The statement reads . . . there is “more uncertainty than usual . . . with activity risks generally on the downside and inflation risks on the upside”. The statement downgraded forecast GDP growth to a mere 1.9% for 2009-10. Inflation is expected to rise above 3% this year. We’ll have a quick look at the main risks:

Downside risks

“Significant global slowdown and its effect on New Zealand”
The US economy directly has a limited impact on NZ with approximately 12% of exports going directly to the US and approx. 9% of visitors are from there. The greater danger arises from the prospect of a material downturn in Asia due to lower global demand. A major global downturn will reduce the strong demand that is underpinning commodity prices worldwide. This would have a greater knock-on effect via Australia to NZ.

“Higher funding costs and tighter domestic credit conditions”
The impairment of the credit markets is already having an effect in New Zealand. The major banks have increased Mortgage rates without an increase in the OCR. “Easy credit” has evaporated. The impact of this on the property market is already being felt.

“A disorderly housing market correction”
As mentioned above the housing market has already begun correcting with about a 10% drop in housing prices in Auckland being reported. You only need to pick up a free copy of the property sales tomes to see there is a significant oversupply of housing currently available. Whether this correction will be “disorderly” remains to be seen, but higher mortgage rates increase the likelihood of housing market problems.

Upside Risks

“Significant exchange rate depreciation”
We currently have the highest exchange rate since 1990 against the USD (see chart above) and it is high against Sterling also. If the NZD depreciates against the USD (back to 60 cents) then we will be looking at “importing” inflation on all USD based trade items. This would mean around a 25% gain in fuel prices to around $2.20 for 91 octane petrol assuming oil remains at USD100 per barrel. Other USD based trade would also suffer a similar increase adding to inflationary pressure.

“Price of emission trading due to Kyoto agreement”
The Reserve Bank has made the first attempt at pricing the effect from the Climate Change Bill introduced in December 2007. Current estimates are that New Zealand will exceed its emission targets and will therefore have to be a net purchaser of emission units from overseas. The costs of this will be passed on by businesses to consumers. Some commentators are putting a figure of 7 cents per litre of petrol as the cost to fuel companies.

Most of the above factors are outside the control of New Zealand policy makers. The only conclusion we can draw currently is that the outlook for New Zealand is cloudy. Whether a storm is brewing or the clouds will clear only time will tell.

Some other food for thought:

There is some talk at the moment of a growing global food crisis. This should be good news for New Zealand over the long term as a net food exporter. Some points we’ve found might be of interest.

There are early signals already of a global food crisis - the tripling of wheat prices (see chart below), the mounting cost of milk, butter and cheese, the steepest increases at the supermarkets for 14 years, “tortilla riots” in Mexico, the drying up of aid to the Third World.

One report last month said that the world is only ten weeks away from running out of wheat supplies after stocks fell to their lowest level for 50 years.

There was a time when the idea of an American-style hamburger would have turned the stomach of the average Chinese; not any more. McDonald's is rolling out a chain of drive-through fast-food outlets in China's 30,000 petrol stations and opening restaurants across that vast country to cater for a new appetite for Western meat.