More bright spots emerge

Economic data which came in during April continued to paint the picture of a global economy which, although slowing, is continuing to grow. European data was more encouraging with preliminary GDP growth coming in at 0.4% for the first quarter, which was above expectations. Perhaps most surprising was the beleaguered Italian economy emerging from what looks to have been a short-lived recession. Beijing declared victory on stimulus measures with Q1 growth coming in above expectations, this backed up strong Chinese export and activity data. In the US, solid employment data has all but shaken off recession fears, which ran rampant over the latter part of 2018. Against this backdrop, global bond yields drifted higher over the month.

Domestically, the data had a softer tone with CPI coming in below consensus expectations (though core CPI remains robust). The latest Quarterly Survey of Business Opinion (QSBO) confirmed business confidence remains in the doldrums, though the ruling out of a capital gains tax should provide a boost to sentiment. While data has been somewhat of a mixed bag as the RBNZ acknowledges, the timing and magnitude of interest rate cuts is not a done deal.

Bond yields, which have been a tailwind for the New Zealand share market in recent months, turned into a headwind in April, as bond yields ticked higher leading to relative underperformance of the many bond yield sensitive stocks which comprise the NZ market. That said, the S&P/NZX 50 index managed a strong return, thanks to the index’s largest constituent, a2 Milk, returning 17.2% over the month.  The Australian market fared slightly better, up 2.4% in Australian dollars, with its more cyclical mix of stocks. 

What to watch

The bounce back in share markets so far in 2019 has been considerable with many markets delivering returns well into the teens. Looking back to late last year, many of the tail risks which worried investors, such as a slowdown in China and an aggressive US Federal Reserve, have since abated. Some risks, such as Brexit and the prospect of trade wars have, in aggregate, delivered more good news than bad. This has led to investors feeling more certain about the global economic backdrop and, therefore, company earnings. At the same time, central banks have generally become more dovish leading to low expected interest rates around the developed world. It is against this backdrop we are keeping a wary eye on share market valuations as well as the relative valuations of defensive and growth stocks.