A little less stimulus ahead

Equity returns are influenced by both earnings growth and valuations. While earnings growth is mostly affected by economic growth, valuations reflect a combination of investor thinking about volatility, longer term growth, inflation, interest rates and bond yields. In this mix, the potential for higher interest rates in New Zealand, coupled with the recent move higher in bond yields may begin to eat away at the bullish case for equity returns in New Zealand.

We are positive about economic growth, especially in New Zealand, but increasingly in the US and more broadly in the world economy. It is reasonable to debate rebalancing risks around growth in China, and about the prospects for growth in Europe. However, for the time being global growth forecasts look comfortable with some positive momentum.

In terms of risks, markets will continue to focus on the impact on bond yields of a tapering and the potential removal of policy stimulus. As we move towards September markets also have a number of other risks to consider including:

• Speculation on the next Federal Reserve Chair
• The result of the German elections where polls have tightened
• The potential for further US Sequestration cuts
• The chance of an early rise in interest rates in New Zealand
• The Australian election result, and, 
• As growth improves the potential for an inflation scare