Over the month of March global markets performed strongly, led by the US market, which has been helped by strong economic data and optimism surrounding policy changes. The US market is now 6.1% higher than it was since the beginning of the year, as well as being up 11% since the election.
Germany has beaten the US market in the same time frames by rising 14%. There is certainly growing evidence of a cyclical rebound in activity levels and globally there is a fair dose of optimism over potential tax cuts and deregulation in the US.
In New Zealand, we have lagged slightly by only being up 4% for the year, though we are still lower by 5% from September’s high. That being said, local data remains robust with population growth being a strong driver. Our economy being strongly supported by factors such as:
- migration continuing at extraordinarily high levels;
- strong construction with a near doubling of govern ment infrastructure spending planned over the next five years;
- dairy prices are 60% up from a year ago;
- tourism is booming with the influx of cruise ships over the summer months;
- potential tax cuts look like being scheduled in the May 25 Budget.
Inflation looks like rising further but cash rate rises probably won’t start until near the middle of next year and proceed at a gradual, exploratory pace which may take the OCR to 3.5% come the end of 2019 from 1.75% currently.
The New Zealand reporting season was both solid and somewhat lackluster. 62% of the NZX50 companies saw consensus earnings forecast for 2017 upgraded, while 38% faced downgrades. Despite this, average earnings growth for 2017 across the index slipped from 6.1% to 5.8%. For a modest growth market like New Zealand this is a respectable number, although it does point to a slowdown in earnings and potentially some looming pressure on margins.
This week saw a tremble in the “Trump reflection trade”. On Tuesday 21st March the S&P saw its biggest daily fall (1.2%) since October 2016. US bonds rallied with the 10-year yield dropping to 2.4%. The market appears to be underpricing political risk in the US and over-pricing political risk in Europe. In the US, equity markets have pulled earnings from the future due to Trump’s pro-growth agenda, which is now facing the realities of Washington DC and a system of checks and balances.
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