The shift from borrowers to investors

By | Insights
This week the second quarter consumer confidence numbers in New Zealand printed at their lowest level since the series began back in 1988 and is a sobering reminder of the...
This week the second quarter consumer confidence numbers in New Zealand printed at their lowest level since the series began back in 1988 and is a sobering reminder of the challenges that lie ahead for many households. On the face of it, this is a nervous time for mortgage holders as the cost of servicing debt continues to go higher around the constant commentary of escalating cost pressures and the need for the central bank to move far quicker than anyone anticipated to combat inflation. However, this forms only one half of the equation. For investors reliant on income, this... Read more

Higher interest rates remain the biggest risk for Financial Markets.

By | Insights
For investors and more broadly financial markets, an unfamiliar foe of rising inflation has swept across the world over the last eighteen months, and central banks are now walking the...
For investors and more broadly financial markets, an unfamiliar foe of rising inflation has swept across the world over the last eighteen months, and central banks are now walking the fine line of trying to cool inflation while preventing an economic slowdown. However, policy makers are clearly more concerned with the former, that inflation will not only become imbedded in consumer and business expectations, but will also unhinge delicate political and geopolitical balances around the world. Whenever governments panic and significantly increase fiscal spending, inflation will tend to overwhelm the usual disinflationary pressures in an economy. Over the last two... Read more

Housing- What can we learn from previous episodes of rising interest rates?

By | Insights
Over the past 30 years, housing price growth has always slowed when interest rates have risen, but higher interest rates have not always been associated with outright falls in house...
Over the past 30 years, housing price growth has always slowed when interest rates have risen, but higher interest rates have not always been associated with outright falls in house prices. The difficulty in drawing conclusions about housing prices from past episodes of higher interest rates has been (i) the ongoing structural decline in interest rates and (ii) easier access to credit, both providing a significant cushion to house prices when faced with headwinds. The absence of a significant economic downturn post GFC has also clearly helped. Over the inflation targeting period since the early 1990s, the fall in interest... Read more

Investing in Long Dated Bonds

By | Insights
The Case for Duration Interest rates all over the world are beginning to rise as economies and populations start to feel a sense of normality following the effects of Covid-19....
The Case for Duration Interest rates all over the world are beginning to rise as economies and populations start to feel a sense of normality following the effects of Covid-19. Strong inflation data is putting pressure on central banks to raise their interest rates, and cool down economies following the vast levels of stimulus injected over the last two years. So as this ‘hiking cycle’ happens, how should your bond portfolio be positioned to potentially benefit from this process? Rising rates are not necessarily bad for bonds, but it is the expectations of interest rate rises and falls that influences... Read more

The housing market conundrum

By | Insights
Predicting the path of house prices in New Zealand is a bit like economists attempting to forecast future inflation, an interesting exercise but ultimately a futile one. That is not...
Predicting the path of house prices in New Zealand is a bit like economists attempting to forecast future inflation, an interesting exercise but ultimately a futile one. That is not to throw ‘shade’ on economists but more an acknowledgement that it is a very challenging task and none of us have the benefit of a crystal ball. What is now becoming apparent is the negative shift in sentiment from market commentators around the upward trajectory for prices of residential houses. It has gone from a moderating in price, to in some quarters a market crash just around the corner. To... Read more

Further rate rises could lead to unexpected outcomes

By | Insights
In the second half of last year, economists en masse moved from only a relative moderation in monetary support needed to a now an accelerated raising of interest rates required....
In the second half of last year, economists en masse moved from only a relative moderation in monetary support needed to a now an accelerated raising of interest rates required. In fact, only this week, one of our major banks increased their OCR (official cash rate) target to 3.00% (previously 2.50%), despite noting ‘The housing market appears to be coming to a very sudden stop; households are facing significant cost-of-living stresses and have subdued confidence; a shortage of workers and materials is hampering production; and Omicron is knocking on our door’. The reason for this change has been the significant... Read more

Is the NZ market a pre-cursor for global markets?

By | Insights
For the best part of a decade, New Zealand has been one of the strongest performing equity markets on the globe. Whilst there are many factors that have supported this...
For the best part of a decade, New Zealand has been one of the strongest performing equity markets on the globe. Whilst there are many factors that have supported this strength; an emerging capital markets, a commodity super cycle, relative political stability, foreign capital investment and positive net migration to name a few. However, this local equity market strength appears to have halted in 2021. For the twelve months ending 31st October 2021, the NZX50 Gross index had returned 8.4%. Now this appears a more than adequate return. However, if we look across the Tasman, the ASX200 has returned 28.00%... Read more

First Reflation, now Stagflation, the cost of Covid 19

By | Insights
Whilst we continue to try and assess the ongoing social and economic costs of this pandemic, inflation has become a key concern for financial markets as it broadens while growth...
Whilst we continue to try and assess the ongoing social and economic costs of this pandemic, inflation has become a key concern for financial markets as it broadens while growth recedes. This unusual mix is in part driven by a lowering of economic support and lack of supply normalization, as the world grapples with differing re-opening strategies and trade channels remain logjammed. Over the past 3-4 months, investors have witnessed a significant acceleration of inflation that is steadily broadening and running ahead of expectations. At the same time, as the initial sugar rush subsided, economic indicators globally are surprising in... Read more

Why long-term interest rates are more likely to fall.

By | Insights
While investors are currently preoccupied with shorter-term questions of higher interest rates, inflation and tightening economic conditions, the reality is interest rates have been on a consistently declining path for...
While investors are currently preoccupied with shorter-term questions of higher interest rates, inflation and tightening economic conditions, the reality is interest rates have been on a consistently declining path for the last three decades and those forces responsible for this phenomenon remain relevant and in some cases are likely to strengthen. What are some of these forces? The increase in size and influence of governments and central banks (financialization) is highly disinflationary and no longer reversable. Central banks decision to manage through crises, with as little damage as possible to financial assets (2001, 2008, 2020) by pumping in liquidity and... Read more

Bank economists continue to ‘lean’ on the RBNZ

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I wrote an article recently highlighting the disadvantages of being a ‘first mover’ in normalizing interest rates ahead of other developed economies such as Australia and the US. The premise...
I wrote an article recently highlighting the disadvantages of being a ‘first mover’ in normalizing interest rates ahead of other developed economies such as Australia and the US. The premise being, this would be premature considering our modest progress in getting the population vaccinated and the likely upward pressure on our exchange rate, at a time when businesses are already facing cost pressures and the uncertainty of future lockdowns. Our local bank economists clearly disagree. Despite the events of this week, they still appear in no mood for a period of further assessment with one bank on record requiring the... Read more