Browsing public site

Quarterly Market Comment

Market: New Zealand
Sector: Financials

Quarterly Market Comment - For the quarter ended December 2019

  • Returns across higher risk asset classes – New Zealand, Australian, and global equity markets — were positive over the quarter, offset by a pull-back from the property and fixed income sectors.

  • The final quarter of 2019 capped off a very strong year for equity returns. The US S&P 500 index was up +28.9% for the year in United States dollar (USD) terms, its biggest one-year gain since 2013. The tech heavy Nasdaq index led the market, rallying +35.2% in 2019 with leaders Apple and Microsoft at the fore up +86.2% and +55.3% respectively.

  • Whilst the strong performance of equities has lifted equity valuations, we expect asset prices are likely to remain underpinned by Central Banks’ commitment to low interest rates, with the risk of a harmful recession remaining low.

Inflation remains subdued and Central Banks remain committed to low interest rates

The last quarter of 2019 heralded a stake shift in sentiment within financial markets. The mood lifted from cautiously wary, to a more optimistic outlook for the year ahead.

The uplift in sentiment was underpinned by the coordinated response of Central Banks to subdued inflationary pressures. During the last few months of 2019, the major Central Banks including the Federal Reserve in the United States, European Central Bank (ECB), Bank of Japan (BOJ), and the People's Bank of China (PBoC), all eased monetary policy by cutting interest rates and other measures. The Central Banks of New Zealand and Australia have also moved to lower interest rates, as did a host of other Central Banks around the world.

Low inflation and renewed stimulus by global Central Banks complemented an improved geopolitical and trade outlook. By the end of the year, a comprehensive victory at the polls for Boris Johnson and the United Kingdom’s Conservative Party went a long way to remove much of the uncertainty surrounding Brexit. And the trade war between the United States and China de-escalated as a ‘Phase 1’ deal was agreed and is scheduled to be signed in mid-January. 

With low inflation keeping Central Bank policy in a stimulatory phase, the global consumer should continue to provide the ‘heavy lifting’ for global growth. Not only have households benefited from lower debt servicing costs, lower interest rates have boosted asset valuations including equities, property and, until recently, bonds. The rising wealth effect of higher asset prices is contributing to the consumer’s ability to spend.

Low inflation is a long-term trend

Global inflation has been trending down since the late 1980’s. Investors have benefited handsomely. Since the Global Financial Crisis, Central Banks have pushed a lot of money into the global economy in an effort to re-stimulate growth and inflation. While consumer inflation has failed to materialise, the excess liquidity and low interest rates have provided a substantial boost to asset prices. In our opinion, these conditions look set to prevail for some time yet.

 Inflation has been trending lower for three decades

December graph 2019

Source: Forsyth Barr analysis, Bloomberg

Stronger New Zealand dollar (NZD) reflects rising global demand for ‘NZ Inc.’

The NZD appreciated sharply (+7.6%) against the USD during the last quarter. The Australian dollar (AUD) also rose against the USD, but it was less buoyant than the NZD. While the stronger currency offsets some of the investment returns from international assets when translated to NZD, it reflects growing global demand for goods we produce, including our primary agricultural and seafood, as well as domestic assets such as government bonds and locally-listed companies. The latest New Zealand Current Account data confirms a surge of inward investment from international investors during the second half of 2019. At the same time, our terms of trade, which reflect the value of our exports over the cost of our imports, remains at a record high.

Deal fever benefited the aged care sector

Another consequence of low interest rates and greater confidence in the economic outlook has been a sharp resurgence in corporate merger and acquisition (M&A) activity. 2019 saw a number of companies acquired and delisted from the NZX including TradeMe, Methven, Orion Healthcare, SLI Systems, and (pending shareholder approval) Abano Healthcare. Metlifecare is now the latest, with its board recommending a takeover offer late in December.

The Metlifecare takeover, plus an improving housing market, boosted New Zealand’s aged care sector. Metlifecare +53%, Summerset +34%, Arvida +31%, Oceania Healthcare +29%, and Ryman Healthcare +24% all delivered excellent gains over the quarter.

Conditions remain ripe for M&A activity to continue. High stock prices provide companies with a strong takeover “currency”, interest rates and funding costs are low, and private equity funds around the world have record levels of cash they are looking to deploy.

Long-termism is the investor’s best friend

Economic expansions generally last for many quarters, or years, while recessions tend to be brief.  The current economic expansion is now the longest on record, continuing for over 10 years in a number of countries. Expansions generate increased prosperity and wealth. This is reflected in rising equity prices. Recessions generally see a correction in equity markets, but in most instances these represent buying opportunities for long-term investors. While the day-to-day headlines can be cause for concern, investors are well served by focussing on long-term trends. Investors that maintain sensibly diversified portfolios with a focus on quality companies and control of credit risk will be able to ride out most short-term corrections that happen from time to time. 

Kevin Stirrat
Director/Strategy,
Wealth Management Research 

Matt Henry
Head of Wealth Management Research

December graph 2 2019 

Not personalised financial advice: The recommendations and opinions in this publication do not take into account your personal financial situation or investment goals. The financial products referred to in this publication may not be suitable for you.  If you wish to receive personalised financial advice, please contact your Forsyth Barr Investment Adviser.  The value of financial products may go up and down and investors may not get back the full (or any) amount invested.  Past performance is not necessarily indicative of future performance.  Disclosure statements for Forsyth Barr Authorised Financial Advisers are available on request and free of charge. Disclosure: Forsyth Barr Limited and its related companies (and their respective directors, officers, agents and employees) (“Forsyth Barr”) may have long or short positions or otherwise have interests in the financial products referred to in this publication, and may be directors or officers of, and/or provide (or be intending to provide) investment banking or other services to, the issuer of those financial products (and may receive fees for so acting). Forsyth Barr is not a registered bank within the meaning of the Reserve Bank of New Zealand Act 1989. Forsyth Barr may buy or sell financial products as principal or agent, and in doing so may undertake transactions that are not consistent with any recommendations contained in this publication. Forsyth Barr confirms no inducement has been accepted from the researched entity, whether pecuniary or otherwise, in connection with making any recommendation contained in this publication. Analyst Disclosure Statement: In preparing this publication the analyst(s) may or may not have a threshold interest in the financial products referred to in this publication. For these purposes a threshold interest is defined as being a holder of more than $50,000 in value or 1% of the financial products on issue, whichever is the lesser. In preparing this publication, non-financial assistance (for example, access to staff or information) may have been provided by the entity being researched. Disclaimer: This publication has been prepared in good faith based on information obtained from sources believed to be reliable and accurate. However, that information has not been independently verified or investigated by Forsyth Barr. Forsyth Barr does not make any representation or warranty (express or implied) that the information in this publication is accurate or complete, and, to the maximum extent permitted by law, excludes and disclaims any liability (including in negligence) for any loss which may be incurred by any person acting or relying upon any information, analysis, opinion or recommendation in this publication.  Forsyth Barr does not undertake to keep current this publication; any opinions or recommendations may change without notice.  Any analyses or valuations will typically be based on numerous assumptions; different assumptions may yield materially different results.  Nothing in this publication should be construed as a solicitation to buy or sell any financial product, or to engage in or refrain from doing so, or to engage in any other transaction.  Other Forsyth Barr business units may hold views different from those in this publication; any such views will generally not be brought to your attention.  This publication is not intended to be distributed or made available to any person in any jurisdiction where doing so would constitute a breach of any applicable laws or regulations or would subject Forsyth Barr to any registration or licensing requirement within such jurisdiction. Terms of use: Copyright Forsyth Barr Limited. You may not redistribute, copy, revise, amend, create a derivative work from, extract data from, or otherwise commercially exploit this publication in any way.  By accessing this publication via an electronic platform, you agree that the platform provider may provide Forsyth Barr with information on your readership of the publications available through that platform.


Access Forsyth Barr research

Explore our research reports, news and analysis by logging into your account.

If you are not yet a client, create an account to read reports and view market announcements and company news.

Quarterly Market Comment