Market Review: A half-year report card

2) How this compares with our outlook at the start of the year

So how well was my crystal ball working at the start of this year? In my commentary at the start of the year I suggested the following:

"the New Zealand sharemarket will be doing well to record a double-digit return for the 2004 year."

"global equities will struggle to match 2003 return levels and will also be doing very well to record double digit returns for the full year."

"the kiwi dollar will probably correct at some stage – although this may be a 2005 story (or beyond) rather than for this year."

"with long-term interest rates likely to rise globally over the next year, bonds will be doing well to provide a coupon return after doing only slightly better than this in 2003."

"having some exposure to hedge (or multi-strategy or absolute return) funds may be the answer for 2004."

So I may have been too pessimistic on equities (New Zealand in particular) and slightly too optimistic on bonds – although there is still six months to go!

A key reason for this is the global and domestic economies have done much better than I expected. This has helped fuel a corporate earnings boom which not only justified last year's sharemarket rallies (and resultant high P/E levels) but has helped lift them further in 2004.

Conversely inflationary pressures are rising on the back of the buoyant global economies after deflation was being talked about as a very real possibility, up until 3-4 months ago. Through this hedge funds performed as expected although the key reason to have these in portfolios remains for risk diversification purposes rather to achieve high returns. I did not have a prediction for global property although we did start investing in this sector in late 2003.

3) How the sectors might perform for the rest of 2004

My view is that global equity markets will not match their first half year's performance in the second half of 2004. The upcoming second quarter reporting season in the US is likely to be excellent with average year-on-year quarterly earnings growth of up to 30% possible. However, much of this is probably in prices already and these earnings gains are then going to slow. The prospect is for range-trading for the rest of the year in most of the major global equity markets, with some risk to the downside.

Recent results from the New Zealand economy have been outstanding with strong economic growth but without the fiscal or trade imbalances that haunt the US at present. We really seem to be in an economic "sweet spot" at present, which could help to underpin the sharemarket.

However, pushing on from here is getting harder and there are the significant head winds of a slowing building sector, falling immigration levels, rising interest rates and a higher kiwi dollar. Thus, my view for this sector is that it will not match its first half year's performance, in the second half of 2004.

It is hard to see bonds producing anything better than a coupon return for the rest of the year. The market has already anticipated significant rate hikes in the US and it would need material inflation shocks to negatively impact on what is already impounded in bond prices. However, there are some risks in this regard as the US Federal Reserve has been very timid so far with its rate rises and is likely to be for the rest of the year, given the upcoming US Presidential election.

As I said in my commentary two months ago, from an economic stand point it is much better to take the interest rate rise "medicine" now and raise rates more significantly. While this may induce a US recession it would reduce the chances of having to deal with the potential of stagflation later, which of course occurred through the 1970s –a period the markets do not remember with any fondness!

On balance, we don't think a repeat of the 1994 global bond market sell-off is likely but it is not impossible given the very easy monetary conditions in the US that have existed for so long and which will continue for at least the next six months.

Whatever the global bond market environment we expect New Zealand bonds to out perform given the anticipated slow down in the domestic economy and the lower inflation risks in this country given our higher interest rate structure.

On the currency side at some stage we expect a slowing domestic economy will be a drag on the kiwi dollar. Another factor is that as rates rise in the US the relative attractiveness of NZ rates lessens, easing demand for the kiwi.

Hedge funds are finding it harder to re-produce the returns of previous years and this is likely to continue going forward. However, this sector continues to offer real diversification value to a balanced portfolio. This comment also applies to global property.

So a reasonable performance from property and equity markets for the half-year but with a tougher end to the year for equity markets predicted, with bonds continuing to struggle.

To see how the numbers stacked up for various markets around the world in the past month and over the year, visit our Monthly Market Review here

Anthony Quirk is the managing director of Tyndall Investment Management New Zealand Limited (Tyndall).

« Wilson speaks out on regulation

Is the world’s banker about to stumble? »

Special Offers

Commenting is closed

 

Printable version

Email to a friend