Current Market Overview
Shares continue to rise as interest rates remain very low
The last six months* have been strong for most equity markets around the world. With the exception of emerging markets, all of the major indices have risen.
- New Zealand and Australian shares were up 11% and 13% respectively during the period.
- The NZ dollar has fallen against the resurgent US dollar, but hit fresh highs against other currencies.
- With inflation very low, New Zealand interest rates are unlikely to change for some time.
- Low interest rates across the world could keep share markets well-supported, even though valuations have increased lately.
- Investment opportunities still exist, but we believe a more selective approach is required.
Global equities continued to rise, led by Europe and Japan. The US share market was up 4.8% during the period, having been one of the weaker regions along with the UK market, which has risen 2.3%. Australian shares performed very strongly with a 13% rise, while European shares had an even stronger period, rising 16.7%. Japan tops the list with an 18.8% return for the six month period.
New Zealand shares have not been far behind. The NZX50 index has gained 11% in the last six months and New Zealand listed property has been stronger again with a 15.4% rise. Migration is strong, the construction sector is in good shape and unemployment is falling steadily. With an average dividend yield of 5.7%, New Zealand shares remain attractive as a source of income for many investors.
The NZ dollar has been strong against most other currencies. This has been most notable against the euro and the Australian dollar, against which the currency has risen 13% and 10% respectively (to record highs in recent weeks). This strength has also extended to the British pound, where the currency is up 5%. Conversely, the NZ dollar has fallen another 4% against the US dollar as the US economy continues to perform well.
Interest rates look set to remain low for the foreseeable future. Locally, we have seen the Reserve Bank of New Zealand (RBNZ) leave the Official Cash Rate (OCR) unchanged at 3.5%. The RBNZ has been very clear to signal that interest rate hikes are off the table for the next couple of years. One reason for this change in stance has been lower than expected inflation. The annual inflation rate has slipped to 0.8%, below the RBNZ’s 1-3% target range for the first time since the second quarter of June 2013, when it fell to 0.7%.
Markets are starting to look expensive, but they could stay that way for some time. Share market valuations have surged over recent months as markets have performed very strongly, and shares in all major regions are now trading above historic averages. However, record low interest rates are distorting traditional valuation measures and markets are more focussed on relative valuations. In other words, shares could remain (or get more) expensive for as long as interest rates stay at close to zero in many places, and while central banks (such as the European Central Bank and the Bank of Japan) continue to print money.
For investors, there are still opportunities in many regions, although we recommend a cautious approach. We suggest buying in instalments to reduce the impact of a potential pullback at some point. We think European shares can still perform well as the Central Bank provides economic stimulus, and as the weaker euro provides support to exporters in the region. US shares have had a strong run and are starting to look expensive, although for New Zealand investors there is likely to be a continuing currency tailwind as the NZ dollar declines against its US counterpart. The UK market has been a poor performer and the British pound has been very weak. Therefore there is an opportunity to add to UK holdings at these levels, as we could see some of this uncertainty reverse in the wake of their election in May.
* to 31 March 2015