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
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.
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