Paul O’Driscoll, Forsyth Barr Authorised Financial Adviser, provides an update on the investment markets for the period covering three months (ended 31 Jan 2021).
Global equity markets surged in November and December fuelled by two key events: (1) positive progress on COVID-19 vaccines, and (2) the outcome in the United States election and prospects for significant further stimulus from the new Biden regime. However, prices generally paused for breath in January.
- Economic activity generally is bouncing back from easing lockdown restrictions. In December New Zealand’s third quarter GDP was reported up +14.0% quarter on quarter, the largest quarterly rise on record. In fact there has been a string of positive NZ macro news:
- Labour market – unemployment rate 4.9%, wage growth of 2% in the middle of the Reserve Bank of New Zealand’s (RBNZ) 1-3% inflation range.
- Booming housing construction – December residential consents 46.6k (annualised, seasonally adjusted), the second highest month on record and strongest quarter on record dating back to 1965.
- ANZ business confidence – Own activity expectations remained at healthy levels, with a net +23% of firms expecting improved activity. Notable was that a net 71% facing rising costs and a net 49% intending to raise prices.
Unsurprisingly the market has switched from expecting Official Cash Rate (OCR) cuts to thinking about the timing of potential hikes. However, rate hikes will not simply be governed by current activity and inflation signals. Other factors will influence RBNZ thinking:
- A significant portion of inflation pressures are likely temporary. Wage inflation is helped by the doors being closed to migrants. The cost of imports is being impacted by freight/logistics issues and difficulties getting goods into the country.
- Because inflation has been below targets since the GFC many central banks around the world have indicated they’re prepared to let inflation run above target for a period to a catch up.
Further rates cuts are off the table for now and it’s unlikely we’re going to see rate hikes any time soon.
Low interest rates should continue to aid the boom in housing construction, and the economy should also benefit from the recovery in global trade and rise in commodity prices lifting our national income. Optimism about the development and distribution of several vaccines along with expected substantial fiscal support from governments is paving the way for a recovery in economic activity in the year ahead.
We remain generally positive but we also expect the recovery to be uneven going forward.
If you’re new to investing, please see Forsyth Barr’s Introduction to Investing Guide available here or to discuss your investment options, please contact Paul. He can be contacted regarding portfolio management, fixed interest, or share investments on 0800 367 227 or email@example.com
This column is general in nature and should not be regarded as personalised investment advice. Disclosure Statements are available for Forsyth Barr Authorised Financial Advisers on request and free of charge.
Paul is an Authorised Financial Adviser (2017) and is accredited as an NZX Adviser. He holds a Bachelor of Management Studies from Waikato University, majoring in Economics and Finance (First Class Honours). Paul’s extensive experience in being responsible for, and investing, sizeable funds has led to very strong macro and thematic expertise which, coupled with micro analysis, embodies a successful and sound investment approach. Having grown up in Tauranga, Paul is now raising his young family in the area and enjoying everything the Bay of Plenty has to offer.