Economic momentum still building

Market highlights

• In September improving economic data and continued monetary easing from the US Fed boosted investor risk sentiment and equity market returns. On many measures equity risk appetite is stretched and some valuations could now be said to be expensive, although in our opinion not all valuation measures are currently fully stretched. Global equities rose +4.6% in the month, a result that could have been stronger as US budget issues hit returns on the last day of the period.
• The New Zealand equity market returned +4.3% in the month, positively led by global markets, by strong local data, and good results from smaller companies like Kathmandu and Synlait Milk. Cyclical stocks also performed strongly in the month.
• A soft GDP report in New Zealand for the second quarter disguised an underlying 2% lift in consumption and construction. The outlook is generally strong. Business confidence has hit levels not seen since 1999. Housing indicators are very robust, the terms of trade is improving, along with the external accounts. The Reserve Bank did its best to maintain a hawkish stance, providing forward guidance that OCR increases will be required “next year”.
• Fonterra lifted their forecast payout to $8.30 and, as a result, analysts have lowered profit forecasts for Fonterra Shareholders Fund units from 45 cents per share to around 32 cents per share for 2014. In contrast, Synlait exceeded prospectus forecasts and analysts lifted slightly their outlook for 2014.
• The Australian equity market rose 2.2% despite an initial positive impact from the election result, the market retained a cautious tone, with patchy data and company results. The utility, consumer staple and property sectors were weak, offsetting strong performances by industrial stocks. Seek continued its strong run up 12% in the month. Iron ore prices drifted lower, BHP lifted only 1.8%.
• In Australia, Oil Search announced their PNG LNG project was “progressing well and is 90% complete and on track to commence sales of LNG in 2014”. Building material and construction stocks performed strongly as signs of an improvement in the Australian building cycle continued. Lend Lease announced very strong pre-sales of their Bangaroo project.

Into self-sustaining growth territory in NZ
The US Institute of Supply Management manufacturing confidence index hit 56.2 for September, a further positive jump, leading global business confidence indices higher across the world. And while the markets entered September cautious about several risks, the discussion around Fed tapering was put to bed quickly as Ben Bernanke delayed the start date, perhaps influenced by concerns over the US fiscal debate, as much as the back-up in bond yields that has occurred in recent months.

Locally in New Zealand the ANZ business confidence survey reached 54.1, the highest level since 1999 and in our opinion is consistent with “self sustaining economic growth ”.

So it is not surprising that the RBNZ has started to talk-up the prospect of interest rate rises in 2014. First up the RBNZ may wait to see the impact of the introduction of macro-prudential tools to potentially cool parts of the housing market. However, it is hard to see that happening to any great extent given that the housing market is currently fuelled by credit led growth and so eventually rates will need to rise. Wheeler has said that “if the loan-to-value speed limit is unable to slow house-price inflation, larger increases in the official cash rate would be required. ”