Concerns weighing on offshore markets

The twin forces of interest rate and earnings growth expectations usually dominate sharemarket valuations. They can be opposing influences with interest rate rises often occurring as an economy (and company earnings) are peaking.

March marked a period where both influences looked to be negative for international sharemarkets with rising interest rates and with sustained earnings growth yet to occur. For example, the US 10 year bond yield rose by 0.5% for the month of March while US companies had more negative, than positive, earnings announcements.

In contrast, earnings growth for New Zealand listed companies through the recent reporting season were quite strong. This is one of the reasons why our domestic sharemarket out performed its international counterparts over the March quarter. The NZSE 40 Gross Index was up 2.5%, compared with the MSCI Index which was basically flat for the quarter (for a hedged investor).

With the New Zealand dollar up 5.5% against the US dollar for the quarter how investors handled currency hedging was crucial. An unhedged investor in New Zealand potentially experienced a loss of 5.5% on the global share index (the MSCI) over the quarter, with virtually all of this emanating from the kiwi dollar’s appreciation.

In March the Reserve Bank of New Zealand (RBNZ) was one of the first central banks to raise interest rates. In contrast to the US where rising house prices have been welcomed as helping it recover from recession (through maintaining high consumer confidence) in New Zealand the RBNZ gave this as one of the reasons behind lifting interest rates sooner than expected.

A key difference behind this view may be the much lower productivity of the New Zealand economy when compared to the US’s stunning record in this area. This allows the US Federal Reserve more scope to keep interest rates at lower levels.

The US and Japanese sharemarkets started strongly in the March month. Much of the Japanese bounce can be attributed to "window dressing" by banks and other parties in an effort to report a better financial position for their March 31 year-end. Japan ended up 3.9% for the month but the sustainability of this must be in question given the apparent inability for that country to take the steps needed to emerge from recession.

European sharemarkets rebounded from two months of decline as German business and consumer confidence levels started to rise. This was reflected in that market’s 7.1% rise but France (+5.0%) and the UK (+3.3%) also rose strongly for the month.

The economic data released in the US during March was generally positive with the consensus view now firmly that the US has recovered and that interest rate rises are set to follow. This meant a rise in yields and resultant negative returns from New Zealand (-0.8%) and global bond indexes (-0.8%) for the month.

However, by month end oil prices had started to rise, initially to reflect an improving world economy and then (later in the month) troubles in the Middle East. The result was a 21% increase in the benchmark West Texas spot price. Like 1973, a sustained and significant oil price rise has real potential to derail the world economic recovery, which up until now has been built on a continuation of strong US consumer confidence (and spending).

In summary, a negative feel at the end of the month after a positive start and first indications are for "choppy" sharemarket performances in April with bonds providing their usual "safe haven" status.