Heavy-hitters share their predictions for the world economy

Time flies when one is having fun and even more so when share markets are moving! Nearly a week has flown by since the New Zealand voting public turned so...

Time flies when one is having fun and even more so when share markets are moving!

Nearly a week has flown by since the New Zealand voting public turned so abruptly to the right (some might say turning away from the left…).  We’ll see the final extent of the turn over the next couple of weeks, but a turn it was.

In fact to me, it feels as if the whole year has flown by and I was reminded of this as my calendar flashed-up for a big, annual financial conference in Sydney.  Once again, global investment bank and financial services giant Citi hosted its flagship annual investment conference in Sydney.  This year it was the 15th anniversary.  Citi has a significant presence “down under”, especially in Australia, and to a much lesser extent here in New Zealand.  It has an on-the-ground presence in 95 countries, does business in nearly 160, and has approximately US$27 trillion of client assets under custody, administration and trust worldwide.  When I checked this week the company had a market capitalisation of around US$80 billion, still a lot in spite of the US$5 billion or so decline from what it was a year ago.

The Citi Australia & New Zealand Investment Conference attracts hundreds of analysts and fund managers as well as some serious heavy-hitting keynote speakers, panelists and industry experts.  This year’s billing was possibly a little less stellar than last year but still many chief executives and chief financial officers from leading Australian and New Zealand companies.  The lineup included former Australian Federal Treasurer, Joe Hockey, former Reserve Bank of Australia governor, Ian McFarlane and current NSW Treasurer, Daniel Mookhey.

Daniel Mookhey, kicked-off the conference as the first keynote speaker.  The NSW Government has A$108 billion in funds to invest – this is almost double the New Zealand Super Fund’s current balance.  Not only that, the State Government spends approximately A$29 billion a year on infrastructure!  The New Zealand Government (and thankfully this looks set to change in a matter of days) said at the last Budget it was committed to spending $63 billion over the next five years, so around A$12 billion a year.  No wonder we are in the poor state we are in and luckily a National-led Government is set to change this.

As in many parts of New Zealand, housing affordability is a big issue in NSW, so much so that the State is losing talent to other regions in Australia.  He talked about the transition to renewables in NSW and pleasingly in New Zealand we are much further down the path.  In NSW, 28,000 km of new energy transmission infrastructure is to be built.  Here we are already 85% renewable, Australia has a renewable electricity target of 82% and that’s only by 2030!

The next speaker, Joe Hockey, one of the Citi conference’s key drawcards, had some fascinating observations and market predictions from his time working in the US and Australia.  From his sources, he predicted there will a Biden versus Trump Presidential race next year.  The crisis in Gaza will be “very significant” and this feeds into higher oil prices, inflation, protectionism and defence spending.  Hockey emphasised the strength of US and Australian relations, and both countries’ security is intricately interlinked.  When people criticize the US, or say they are falling behind, Joe laughs them off:  a case in point sees medical innovation in US as second to none, and he talked about the exciting anti-ageing research happening right now at Harvard.

According to Citi, the global economy has fared better than expected over the past year or so.  Citi’s investment strategists currently prefer Technology, Cyclicals, and the Resources sectors and are underweight in their allocations to Energy, Consumer Staples and Utilities.  The investment bank maintains its call for a US recession next year.  Specifically, the labour market needs to weaken for core inflation to reduce.  Global corporate earnings are expected to be flat this year but grow a healthy 10% next year.

Elsewhere in the small group company sessions that Hobson Wealth attended, a key area of focus was the outlook for commercial property.  Office buildings in Australia have seen a lot of “bloodshed” in the last few years.  Brisbane and Perth markets are holding up, but office space in Melbourne may have changed forever.  That’s what the world’s longest lockdown will do to a city!  Many listed office companies are trading at huge discounts to their net asset values but most executives say headwinds will remain as long as interest rates stay at the current high levels.

Speaking of which, one time the crowd was most engaged was when the screen lit up with a survey of which global developed world central bank would be the first to cut interest rates?  The Reserve Bank of New Zealand was the recipient of over 70% of the vote!  This week’s quarterly inflation print at 5.6% annualized backs up this view and hopefully things for now at least are moving in the right direction i.e. lower.

Inflation is slowly on the way down in Australia too but former Reserve Bank of Australia (RBA) Governor, Ian McFarlane says rates should stay higher for longer.  He felt the RBA’s assumption that it won’t get back to trend until 2025 seems reasonable.  McFarlane agreed the impact on economic activity from this hiking cycle was less pronounced than expected.  Partly what’s holding it up is rapid population and employment growth, but he does think contraction is on its way.

Once again, the overall tone of the conference was bearish, with inflation stubbornly high, no interest rate cuts in sight and a relatively strong outlook for the US dollar with a hawkish Fed.  A strong greenback means more weakness for both the Australian and NZ dollars.  Good for our exporters but bad for imported inflation.

As I remember saying after last year’s conference “hunker down” and until interest rates start to come off, I don’t think I’ll be changing my tune.