RURAL PROFESSIONALS
Money Talk Covering the three months ended 28 February 2017 very accommodative levels of interest rates, but higher inflationary pressures caused by proposed fiscal measures are likely to result in higher long-term interest rates. Global growth still in robust health Even before Trump’s ‘Make America great again’ pledge, United States manufacturing was doing well and manufacturing data globally has also been improving. In the United States, fiscal policy implementation is now required to reinforce the positive sentiment and drive further gains. In Europe, accommodative monetary policy remains the main economic driver and is at last delivering. Manufacturing growth in January was the best monthly gain since April 2011. This was accompanied by the best employment gains in nine years, as hiring accelerated
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April 2017
in both the manufacturing and services sectors, driven by a sustained growth in new orders. Japan’s manufacturing sector also grew in January at its sharpest rate in three years. Both production and new orders expanded at a robust pace, with a large part of new orders driven by foreign demand. Equity markets are forward looking Improving global growth has been reflected in very healthy returns from equities over the last quarter, with the implications of President Trump’s fiscal expansionary policies further emboldening investors. Forward earnings expectations have lifted, with some of the benefits of tax cuts and a reduced regulatory burden being key drivers. Sectors that have benefitted have included financials, industrials and the
energy sector. In Australasia, Australian equities outperformed New Zealand during the last quarter. Australia has benefitted from the rebound in the resources and financials sectors, while New Zealand’s market is still regarded as dominated by companies that are considered to be interest rate proxies. These companies are less attractive in a rising interest rate environment. The reporting season in New Zealand also disappointed as cyclicals dominated downgrades at the operating earnings line. New Zealand inflation picks up but RBNZ expected to remain on hold While it is now likely that the United States Federal Reserve could raise rates as early as this month, the Reserve Bank of New Zealand is still expected to keep interest rates on hold.
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This is reinforced by the current governor (stepping aside in September 2017) and the Bank consistently reiterating that no move is expected before 2019. In addition, while New Zealand’s core inflation rate has picked up, it is not expected to reach its 2% target until late 2018. New Zealand’s longerterm interest rates however, are 90% correlated to United States interest rates. These are therefore likely to be driven by the United States outlook. Accordingly, the change in interest rates during the last three months is expected to reflect a pause, rather than indicate a change in the outlook for higher longer-term interest
rates in a year’s time. If you’re new to investing please see Forsyth Barr’s Introduction to Investing guide available at forsythbarr. co.nz/investing-with-us/newto-investing or to discuss your investment options please contact Andrew Wyllie, an Authorised Financial Adviser with Forsyth Barr in Christchurch. He can be contacted regarding portfolio management, fixed interest, or share investments on 0800 367 227 or andrew. wyllie@forsythbarr.co.nz. This column is general in nature and should not be regarded as personalised investment advice. Disclosure statements are available on request and free of charge.
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Investment markets update European elections but still plenty to watch in the United States As we move into March, political attention is likely to shift from the United States to Europe. Economically however, the United States should remain a focus. The potential passage of legislation lowering United States corporate taxes and proposed broader adjustment taxes, is far more important than any border wall and is at the heart of kick-starting investment activity in the United States. It also has implications for inflation and the United States dollar. The United States Federal Reserve is also now picked to raise the Federal Funds rate, with the market now pricing in a 90% probability of this occurring following President Trump’s recent speech to the United States Congress. We are still talking
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