Yovich & Co. Market Update - 9 January 2017
Jan 9, 2017 | Commentary
Global Economic and Equity Market Outlook 2017
The macro backdrop is one of modest acceleration in global GDP growth, with assessed upside risks to the Credit Suisse view of 3.0% global GDP growth in 2017. Credit Suisse have also recently raised their mid-year 2017 target on the S&P 500 to 2,350 (an increase of 4% from current levels) from their previous forecast of 2,200. Key positive factors expected to support equities going into 2017 include:
- Equities are an under-owned inflation hedge,
- Earnings revisions are at a five-year high,
- A shift in policy, moving away from negative interest rate policy towards fiscal easing,
- Still reasonably elevated equity risk premium,
- On-going excess liquidity,
- Rising economic momentum, and
- Trump a net positive for equities – via fiscal stimulus, corporate tax cuts and deregulation.
Nevertheless, Credit Suisse has forecasted a down market in 2H2017 and has an end-2017 target of 2,300. Underpinning the expectation of a more challenging environment for equities includes:
- The potential negative impact of US bond yields rising above their forecast 3% end of 2017 level,
- Rising US wages squeezing profit margins,
- Business model and political risks remain unusually high, and
- The risk of China refocusing on reform rather than pro-growth policies.
NZ Economic and Market Outlook 2017
FNZC are forecasting annual average GDP growth for the NZ economy over the calendar 2016 and 2017 years of 3.4% and 3.0% respectively. This compares with a long-run average GDP growth rate of around 2.5%. This above trend domestic economic backdrop is expected to be supported by high net migration, strong construction sector activity, robust tourism growth, together with accommodative monetary policy settings.
Nevertheless, it is reasonably clear that a large contributor to the recent robust rate of growth in real headline GDP has been the sharp rise in population growth, which is currently increasing at a rate of around 2.1% YoY. In addition, around two-thirds of this population growth reflects historic high levels of net migration. As a result, removing the current rate of population growth shows the annual pace of per capita GDP growth at a considerably more modest 1.4% YoY.
Key risks to this above trend domestic GDP growth profile include developments in the global economy (Euro-area economy prospects, potential Trump administration policies and Chinese growth concerns), together with the risks associated with a sharp correction in the elevated domestic housing market. In addition, we would also add to the domestic risk profile the prospect of the rise in political uncertainty and associated potential for policy changes in the wake of the upcoming general election – which needs to be held by 18 November 2017.
Despite a profile of above trend GDP growth, headline inflation and inflation expectations continue to remain subdued – although there are increasing signs that domestic inflationary pressures have likely troughed. In particular, after recording a modest annual increase in CPI inflation of 0.4% YoY over the September 2016 quarter, we expect inflation to move back to within the 1-3% inflation target range in the December 2016 quarter.
Following the 25 bps cut in the OCR to 1.75% at the RBNZ’s November Monetary Policy Statement (MPS) we assess that the most likely scenario is for an unchanged OCR over the whole of the 2017 year. Moreover, we assess that the current OCR level of 1.75% - in the absence of a significant downside shock – likely represents a trough in the current interest rate cycle. Thereafter, as headline inflation begins to move back towards the targeted 2% targeted mid-point, we expect the RBNZ to gradually begin the process of removing its accommodative monetary policy settings over the first half of 2018.
At the long-end of the curve, given the historic close correlation between movements in the US and NZ yields, we expect NZ 10-year bond yields to follow US rates higher. In particular, we expect the current NZ 10-year bond yield of 3.3% to move up to around the 4.0% level by the end of next year. With regards to the NZ dollar prospects, Credit Suisse expect a relatively modest depreciation over the year ahead, with the NZD/USD exchange rate expected to ease back from its current 0.72 level to around 0.71 and 0.69 over the 3-month and 12-month forecast horizons respectively.
The above analysis was sourced from First NZ Capital Research.
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