Market Outlook: Records broken

Markets were buoyed by a dovish statement from the Fed, whose “patient” approach is unlikely to see any rate rises for some time. A “great” trade deal has been touted between the US and China, which has breathed further life into investment markets.

Global growth displayed fresh signs of weakness in March, most notably in Europe where trade with China has declined. This prompted the European Central Bank to downgrade growth forecasts, sparking a fall in bond yields. Fourth quarter US GDP was revised downward on weaker consumer spending and non-residential investment. While the US economy is slowing, the preconditions for a recession are nowhere to be seen and the leading indicators are painting a picture of a muddle through growth scenario.

Domestically, government bond yields fell to record lows as the RBNZ acknowledged the weaker global economic outlook and ensuing risks to the domestic economy. The decline in yields has been dramatic this year, with the ten-year bond yield falling by 0.6% to 1.75%. Key to the fall in rates was the RBNZ’s comment that “the more likely direction of the OCR is down”, leading to the market pricing in two OCR cuts in the next 12 months.

Record low yields led investors towards higher dividend-paying stocks, a key feature of the New Zealand market. This created a further tailwind to the performance of our local market, which also benefitted from the improved global sentiment towards risk assets. The appetite for yield has driven the dividend yield on the S&P/NZX50 Index to its lowest level since 2002.