We’re roughly half way through the year (how did that happen so fast?), and the shortest day is now behind us. What is the latest outlook for investment markets?
New Zealand cash and fixed interest
Most economic forecasters anticipate long term interest rates will gradually edge higher, with the NZIER forecaster poll predicting 10 year government bond yields will average 3.4% during the year to March 2018, up from 2.8% the year before. Fixed interest investors can anticipate gradual increases in term deposit rates, but bond investors should be wary.
Opinions on the NZ dollar are mixed, although a majority of forecasters are expecting some modest depreciation. Based on this, a small boost to investors’ returns from unhedged overseas assets looks more likely than not.
International fixed interest
While the pace and magnitude of global interest rate hikes may be less than was forecast a year ago (which has led to global bonds performing reasonably well over the last 12 months), they are still likely to happen as inflation reappears. Interest rate increases typically equate to a capital loss for bonds, hence the outlook is negative.
NZ commercial property
The backdrop for commercial property is generally favourable. Strong population growth, a buoyant economy, and growth in the numbers of office workers should see demand for office space (especially in Auckland) stay high, and vacancy rates low. Commercial property provides dividend yields of around 5% at present, although gradually rising interest rates may offer an alternative for yield-seeking investors. Outlook: positive returns, but likely underperformance v the wider share market.
Australian & international property
In Australia, retailers have been struggling (some closing their doors) in the face of increasing online competition, including the upcoming arrival of Amazon. This however has boosted the demand for warehousing, storage and logistics properties. With similar headwinds from rising interest rates, underperformance v equities is likely.
Rising interest rates are likely to be an even bigger hurdle for global commercial property, where the global property index yields only 3.7%. The outlook here is for underperformance.
The NZ economy is full steam ahead. Commodity prices have increased across the board, businesses are generally upbeat about their prospects, and prepared to hire and invest. Expectations for profits (which were already high by historic standards) have risen further. NZ equities are expensive (19.9 times projected earnings), but can continue to perform well on the back of the strong economic conditions. The outlook is for further strong performance.
In Australia, economic growth has been more muted, although recent signs of a pick-up in activity are encouraging. While Australian shares are less expensive (15.3 x prospective earnings), the consensus is there will need to be more evidence of stronger economic growth before we see anything other than modest equities performance. Outlook = treading water.
Equities have been performing well in Europe with generally increasing economic growth and no major political shocks in recent elections (although UK shares have stalled with the minority government election outcome). The US has also performed well year to date, increasing over 8%. Lower than expected GDP growth has held Japan back (4% increase YTD), but emerging markets have continued to outperform the developed world, up 16% YTD.
The World Bank and OECD are forecasting the word economy to grow strongly at around 3.5% this year, with China and India at the forefront. This strong forecast growth supports expectations for global profit growth, and does support high valuations. The consensus view is that global equities will continue to grind out further solid gains over the next 12 months.