CIP INVESTMENT MARKET COMMENTARY
Prepared by Peter Collerton, Capital Investment Planning Ltd
August again was a month of mixed market performance. The US S&P 500 was up 1.0% for the month but is down -12.9% for 1 year. The UK FTSE100, French CAC and Australian All Ordinaries all had positive months of 4.1%, 2.1% and 3.2% respectively but are also in negative territory for the year. The Chinese Shanghai Comp. was the big mover posting a negative -13.6% for the month and now down -54.0% for 1 year. The NZSE 50 posted a slight 0.5% gain and is now down -18.6% over a year.
Bond yields continued their downward trend as the expected interest rate cuts were factored in. This has the effect of increasing the value / cost of tradable bonds.
The NZD fell against all currencies because of continued interest rate cuts. The AUD/NZD stabilized as the Reserve Bank of Australia indicated it will begin cutting interest rates before year end.
The Reserve Bank has made its second cut to the OCR of 50bp which surprised most, 25bp being expected. The Monetary Policy statement was cautious.
“The New Zealand economy is experiencing a marked slowdown, led primarily by the household sector. The outlook for the global economy has deteriorated further in the wake of continued financial market turmoil. In addition, the New Zealand business sector is coming under pressure from both rising costs and falling demand. While domestic activity is likely to pick up late this year as a result of personal tax cuts, increased government spending and rising rural incomes, we expect a prolonged period of household sector adjustment and below-average growth.”
The policy statement indicates that there is growing evidence of the US housing crisis which has knocked on into a global financial crisis, affecting markets and consumers worldwide.
“Reflecting continued weakness in many housing markets internationally, we are projecting only a mild recovery in global growth over 2009. Our projected outlook is weaker than that implied by the latest Consensus forecasts, and we believe the risks remain to the downside. These risks relate partly to a more protracted slowdown in Europe, but more significantly to the risk that the effect of slowing Western economies on Asia is more severe than we have assumed.”
Bank failures continue in the US and home loan defaults continue to rise. The US Federal Reserve has been forced into a position of “rescuing” Fannie Mae and Fannie Mac and underwriting its USD 5.3 trillion in assets. Write-downs by banks have passed USD 500bn and are continuing with no end yet in sight.
No, we have felt the effects here and will continue to do so. The biggest effect is the cost for NZ banks to borrow money to fund their activities. Our banks borrow over 50% of their funds offshore. The cost of doing this has increased and shows no sign of abating.
On the next page you will find a chart from the Monetary Policy statement which shows the rise in the cost of bank funding for New Zealand and other countries.
Spreads between three-month Interbank and Overnight indexed swaps
Source: Bloomberg, RBNZ
What is also interesting is the change in the perceived risk for lending money. NZ used to be the “riskiest” country but there has been a remarkable change over the last 18 months. The US is now perceived to be far riskier. This also illustrates the seriousness of the global financial crisis. Who would have believed it is seen as riskier to lend money overnight to an American or UK bank than to a NZ bank?
The price of oil has reduced from its heady $150 to a more palatable $105. Unfortunately for NZ the USD exchange rate has also moved so the possibility for a change in price at the pumps has been neutralized.
Source: International Energy Agency
Global oil demand figures have been reduced for the rest of 2008 and 2009 due to weaker demand from OECD countries. Supply has stabilized, but is still in balance with demand.
Source: International Energy Agency
as at 31 August 2008
|
1 Year |
3 Years |
5 Years |
|
Avg % p.a. |
Avg % p.a. |
Avg % p.a. |
| Inflation (Jun 08) |
4.0 |
3.1 |
2.7 |
| GDP real (Mar 08) |
1.9 |
2.3 |
2.9 |
| Housing (Mar 08) |
2.8 |
9.7 |
16.1 |
|
|
|
|
|
| 6 month Deposit |
8.3 |
7.7 |
7.1 |
| 90 -day Bank Bill |
8.8 |
8.2 |
7.6 |
|
|
1 year ago
|
3 years ago
|
5 years ago
|
| NZD/AUD (rate x years ago) 0.8031 |
0.8766 |
0.9126 |
0.8937 |
| NZD/GBP (rate x years ago) 0.3753 |
0.3622 |
0.3877 |
0.3651 |
| NZD/USD (rate x years ago) 0.7102 |
0.7285 |
0.6950 |
0.5823 |
|
|
|
|
| NZD/AUD (% chg) |
9.2 |
13.6 |
11.3 |
| NZD/GBP (% chg) |
-3.5 |
3.3 |
-2.7 |
| NZD/USD (% chg) |
2.6 |
-2.1 |
-18.0 |
|
% return p.a.
|
% return p.a.
|
% return p.a.
|
| NZSX 50 Gross Index |
-18.6 |
0.0 |
n/a |
| ASX All Ords Gross Index NZ$ |
-16.5 |
6.1 |
12.6 |
Hang Seng (Hong Kong) |
-11.4
|
14.2
|
19.0
|
|
Nikkei 225 (Japan) |
-21.1 |
1.8 |
5.3 |
| SSE Comp (China) |
-54.1 |
35.4 |
13.7 |
| S&P 500 (USA) |
-13.0 |
1.7 |
5.5 |
| FTSE 100 (UK) |
-10.6 |
2.1 |
7.1 |
| GDAX (Germany) |
-15.9 |
11.0 |
16.9 |
| CAC40 (France) |
-20.8 |
0.6 |
7.1 |
| MSCI World Index NZ$ |
-11.6 |
6.1 |
7.1 |
|
|
% change p.a.
|
% change p.a.
|
% change p.a.
|
| Gold |
26.5 |
30.7 |
26.8 |
| Oil |
63.4 |
30.1 |
58.9 |
Prepared by Peter Collerton, Capital Investment Planning Ltd, September 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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