Harbour Monthly Commentary: Stronger global growth signals

December seemed to mark the month of further transition to cyclical and growth stocks in both Australia and New Zealand. The New Zealand equity market returned 25.9% in 2012 – outperforming the World MSCI index, which rose 9.4% in New Zealand dollar terms.  The Australian ASX200 index was up 20.3% in Australian dollars for the year, and up 15% in New Zealand dollars.

Extremely low interest rates will create challenges for investors. Initially, in hindsight it may be obvious that investors will chase yield. But yield alone has limitations; sometimes companies face declining growth opportunities and the prospect of dividend cuts in future years. Eventually, as clarity on future growth improves, investors seek better longer term growth investments. Companies that will grow earnings despite of various headwinds and those that may benefit from the cycle ahead become sought by investors.

Additionally, although corporate profit growth expectations are generally low, valuations of equities relative to cash and bonds look cheap. This is why many defensive yield investments are giving way to both secular growth stories and well placed cyclical recovery opportunities.