Harbour Investment Outlook: Past the winter solstice, but is it spring yet?

New Zealand and Australian share market returns over the month were dominated by profit results, earnings downgrades, and a sharp move up in long term US and New Zealand Government bond yields, which increased the return hurdle required by investors and dragged on returns for defensive shares and pre-profitability growth shares. While actual profit results for the June period were generally ahead of conservative expectations, weak earnings guidance from company management contributed to a higher-than-normal number of earnings forecast downgrades relative to upgrades. There was significant dispersion between individual share returns over the month - this was a market environment where being selective enhanced portfolio performance.

Central banks are continuing to agonise over policy settings that appropriately reflect inflation concern and slowing economic activity. At one end of the spectrum, the Reserve Bank of Australia maintained its policy stance at its August meeting, partly due to a substantial drop in consumption growth as households respond to cost-of-living pressures and higher interest rates. On the other hand, Federal Reserve Chair Jerome Powell emphasised the central bank's commitment to lowering inflation to the 2 percent target in his speech at the Jackson Hole Economic Symposium in late August. Powell noted that, despite progress evident in a further slowing in job growth and ongoing disinflation, more work was needed to achieve price stability.
Weakening trading-partner demand, driven by a slowing Chinese economy, has resulted in a significant decline in New Zealand's commodity export prices in recent months. This decline poses multiple challenges for our economy. The reduced export revenues are likely to have a negative impact on economic activity, potentially leading to a further deterioration in the fiscal accounts and necessitating additional bond issuance. The export weakness is likely to hinder the improvement of the current account balance, increasing New Zealand's reliance on the global economy and putting pressure on the country to attract foreign investment via a weaker New Zealand dollar or higher long-term bond yields.

What to watch – falling prices putting pressure on the agricultural sector

In early August, Fonterra reduced its 2023/24 season milk price forecast by $1 to a mid-point of $7 per kg of milk solids. With Fonterra collecting milk amounting to 1.5 billion kilograms of milk solids each year in New Zealand, this equates to 0.4% of GDP before indirect economic effects are considered. Some economists suggest the broader impact on the economy could be as much as 4-5 times the direct effect. $7 per kg of milk solids is also 15% lower than last season’s price of $8.20 and below most estimates of a breakeven rate. Dairy is our largest export, making up 30% of total goods exports or $22bn per year. Other key export prices have also been under pressure from slowing demand, including lamb and log prices. Meat and wood exports make up 12% and 7% of total goods exports, respectively. Unfortunately, farm costs have been moving in the other direction, putting pressure on the agricultural economy.