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Recent Events & Possible Outcomes in Local & Global Financial Markets

The Global Economy

  • US recovery underway with improvement in jobs, consumer sentiment, housing and industrial activity
  • US Federal Reserve signals low rates until 2014, to encourage growth
  • UK enters double dip recession ahead of Olympics
  • Greece reaches deal with creditors
  • European Central Bank helps Europe refinance €529b in loans
  • China GDP growth eased to 8.9% from 9.1%
  • Australian Reserve Bank lowers interest rates by 0.50%, to combat high dollar and weaker than expected inflation

Since the beginning of 2012, the tentative global economic recovery has gathered pace. The U.S economy is improving, ahead of elections later this year. This is also being helped by assurances that interest rates will remain low – or effectively close to zero – until late 2014, which has given a boost to domestic U.S confidence.

In Europe, Greece reached a voluntary deal with creditors to swap their current holdings of Greek bonds for new bonds with later maturity dates and lower returns. This enabled the Greek government to write off around €100 billion of its debt, and paved the way for a €130 billion bailout package by international lenders (although this is still reliant on the implementation of austerity measures).

Spain is also attracting more attention given a recent cut to its credit rating, which is now BBB+, after the country slipped into its second recession in three years. The Government is pushing through budget cuts to reduce its debt but this does little to address the country's 24% unemployment rate, one of the highest rates in the developed world.

The Spanish government has already rescued a number of banks that were too exposed to a decade-long construction boom that crashed in 2008. Whilst the country's banks will likely continue to require financial assistance from the government, the market does not expect Spain to default on its government-issued debt like Greece did.

In Asia, China's annual economic growth slowed to below 9% for the first time in a decade. However, financial markets had been anticipating a slowdown for some time, due to lower demand for China's exports and the government's attempt to curb the growth of domestic house prices.

Australia's economic growth is slowing below long term averages. The high value of the Australian dollar is curbing domestic activity, as it makes their exports less competitive in world markets. With Australia's inflation rate now trending below the Reserve Bank's 2% to 3% range, interest rates were cut by 0.50% on May 2nd. This was a steeper cut than markets were anticipating and reflects the fact that the positive effects of the mining boom are not flowing through to all sectors of the economy. The market is now anticipating Australian interest rates will fall by a further 0.50% over the next year.

The Global Economy

Both business and consumer confidence levels are positive and/or rising, but this confidence is not being directly reflected in key economic measures.

The labour market is improving, but only slowly, with job numbers increasing by just 10,000 over the last three quarters of 2011. The economy itself managed modest annualised growth of only 1.5% over the same period.

In the housing market, while sales volumes are 25% up on a year ago, there is no widespread evidence of any significant price increases. New housing consents are also up modestly, but from extremely subdued levels, and new consent levels clearly remain well below historical averages. Non-residential consents were also flat for the last six months.

With domestic CPI inflation running at 1.6%pa, a relatively strong New Zealand dollar and the absence of any impetus yet to come from the construction sector or the Christchurch rebuild, the prospects are growing that New Zealand's next interest rate rise may now not occur before 2013.

Financial Markets Overview

  • Q1 2012 was the best quarter for global equity markets in 14 years (this confirms the benefits of diversification and discipline)
  • "Risk On" climate boosted small stocks, value stocks and emerging markets
  • Strong rebound in financials globally, after poor 2011
  • New Zealand performed in line with major developed economies
  • Australia lagged due to high $A and slowing economy

The graphics below shows the returns of various asset classes to 31 March 2012.




In the second half of 2011, investor fears drove the New Zealand and global share markets down by, generally, between 5% and 10%. With investors' worst fears ultimately not being realised, risk appetites rebounded in the March quarter. The MSCI World index (a proxy for global share markets) posted its best quarterly performance in 14 years. As can be seen below (data in Australian dollars) all developed markets produced positive returns in the quarter, except for Spain:

Within the equity markets, there were strong performances from small stocks, emerging markets and value stocks.

The MSCI emerging markets index posted its best first quarter performance in 20 years. It was noteworthy that some of the countries that previously lagged in 2011 were among the best performers.

Compared to major developed markets, New Zealand shares performed relatively well. Small companies were the best performing asset class, globally, in the March quarter and New Zealand was no exception, where smaller company shares significantly outperformed the NZX Top 10 Index.

Appetite for yield continued to support the Listed Property Trust sector, with the New Zealand Property Index gaining 8.1% for the quarter.

With risk appetites reawakening, returns from fixed interest naturally lagged those of shares. Nevertheless, at the corporate level at least, they still were positive. While in 2011 the demand was for the highest rated government bonds, attention has now shifted to corporate debt.

Note: This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor's objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.

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Last updated:  Tuesday, 15 May 2012   |   9:45:23 a.m.

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