The Month Ahead

October 2023

It was another challenging month for investment markets with most share markets lower as we close in on the end of September, while bond markets continue to struggle against the backdrop of higher interest rates and concerns rising oil prices may bring a rebound in inflation rates. 

In the US, as of 27 September, the S&P 500 and NASDAQ 100 were both on track to record back-to-back monthly declines, while in New Zealand, the NZX 50 continues its struggles as it traded to its lowest level of the year, and with a few days left in the month, it too is on track for a second straight monthly decline.    

Bonds continue to be the big story as many government bond yields are at their highest levels since before the Global Financial Crisis, despite most central banks appearing to be at or near the end of their rate-hiking cycle.

[Video: Question and answer session with Max Lesser, ANZ’s Head of Equities, New Zealand.]

Question: What did you learn from the recent reporting season?

Max Lesser: The recent reporting season came in below market expectations with the NZSE50 falling almost 4% during the month of August. The focus of the reporting season is less about the results for the year passed and more on the guidance for the new year. The reason for that is that companies update guidance throughout the year so it’s very rare that a result will come in too different to what the market is expecting. However, guidance provided for the new year is the first time the market gets to see what the company is expecting. And, in that respect there were more downgrades to analyst expectations than there were revisions upwards. While looking at forecast on a line by line basis revealed that revisions to revenues were fairly mixed but revisions to operating costs and interest expense were both higher and hence that was the source of the downgrades.

Question: How important are interest rates to equities?

Max Lesser: Interest rates and inflation are very topical at the moment. And, so long as you believe that share prices follow, rather than sentiment, but the intrinsic value of a company then they are very important to equities. There’s a few different way of explaining that linkage but possibly the easiest one is by recognising that an investment in equities is more risky than an investment in bonds. But, if the interest rates paid on bonds goes up, the expected return from equities needs to also go up. 

Question: Which are the most relevant interest rates?

Max Lesser: That’s a great questions because there are many different types of interest rates. Because companies do not pay out a 100% of their cash earnings and reinvest part of those cash earnings back into the business, the returns to investors from investing in equities is over a long period of time so the most appropriate interest rates to compare them to with are longer dated maturities that you get from say Government bonds rather than say term deposits. And, taking this a step further, because of that reinvestment that companies make in their business you can view them sort of like Grandfather’s Axe where those  businesses should be able to sustain their earnings going forward and achieve earnings that at least keep pace with inflation. And therefore, the most relevant rate for comparing with equities are the returns on index linked Government bonds over a maturities of 10 or more years. So, in terms of the Government 10 year linker bond interest rates, they started the year just a bit above 2% and they fell for the first few months down to about 1.6% but since then they’ve climbed quite strongly to 2.8% which is the highest they’ve been in over 10 years. So, that’s quite concerning, especially considering the NZSE50, over the same period of time, has declined only a few percent.

Question: What is the outlook for New Zealand equities?

Max Lesser: Well, we’ve been talking about macro issues such as earnings downgrades and interest rates, so on the basis of those our outlook is cautious. But I should add, that the New Zealand market is very concentrated with just three stocks representing more than 25% of the index and ten stocks representing over 60% of the index. So, it’s quite likely that there’ll be some company specific or industry specific factors which have a greater impact on the share price than those macro factors. And, in fact, the way that we put together our portfolios at ANZ is that we choose companies of the highest quality which we believe will count for more over the long term than the macro forces they’re facing.  

Important Information

Published 22 September 2023. Information can change, is general, and not advice. 

In good faith, we’ve used reliable sources to get this information, but we don’t promise it’s accurate, complete, or suits you. To the extent the law allows, we don’t accept responsibility for loss or damage if you rely on or use this information.

Past performance is not indicative of future performance. We don’t guarantee performance, which depends on many things, and could be positive or negative. 

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New Zealand General Election

On 14 October, New Zealanders head to the polls for the 2023 election, where the Labour Party will seek a third consecutive term in office. Having lost leader Jacinda Ardern in January, new leader, Prime Minister Chris Hipkins, has taken over the reins, but he and his party appear to have suffered from dwindling support since.

Although topics such as education and healthcare sit at the forefront of debates and policy, inflation and the cost of living is by far and away the most important issue for voters. According to the latest IPSOS issue monitor, of those surveyed, 62% said it’s one of the three most important issues currently facing New Zealand. Crime/law and order now sits as the second most important issue (36%), followed by the cost of housing (32%).

New Zealanders’ rating of the Government’s performance has also significantly decreased over the last six months, reaching a record-low mean score since surveying began in 2018.

At the time of writing, and with just over two weeks to go, it looks like National and ACT could be on track to form a government according to the latest 1News Verian poll, although the margins remain slim after both of the two main parties have dipped slightly, with the difference being picked up by the minor parties. 

Reserve Bank of New Zealand likely to leave rates on hold

On 4 October, the Reserve Bank of New Zealand (RBNZ) will meet to discuss rate setting in New Zealand, where it’s expected to leave the Official Cash Rate (OCR) unchanged at 5.50% and maintain its hawkish monetary policy stance.

Recent economic strength suggests the RBNZ faces a tough challenge ahead to quell excess demand and get inflation back into the 1% to 3% target range. This follows recent GDP (Gross Domestic Product) data, which showed the local economy grew at a faster-than-expected rate in the second quarter, up 0.9% (and an annual rate of 3.2%). A revision higher to first quarter GDP also meant the economy managed to avoid a recession early this year. However, many economists believe growth is being propped up by strong net migration and cyclone Gabrielle rebuild efforts, and that underlying growth is likely to be weaker.

While interest rates markets have moved to price in one more rate hike this year, they do not expect this to happen at its upcoming meeting, with a move in November more likely. That being said, the committee will likely place great emphasis on two upcoming data releases in October, these being third quarter inflation and labour markets data, ahead of making its next decision.

Overseas central banks to keep rates ‘higher for longer’

The US Federal Reserve (the Fed) left the fed funds rate on hold in September, but expectations are for one further rate hike this year. The key change following its recent meeting was to expectations around rate cuts. Previously, it had forecast four rate cuts in 2024, but its closely scrutinized ‘dot plot’ chart now shows this has reduced to two – suggesting that its members expect interest rates to stay higher for longer. The Fed will meet late in October.

Interest rates in Europe also appear to have peaked following the recent 0.25% hike from the European Central Bank (ECB). It believes interest rates have reached levels that, if maintained for a sufficiently long duration, should return inflation to target levels.

Meanwhile, following 14 consecutive hikes, the Bank of England (BoE) left UK interest rates on hold in September, as inflation there showed an unexpected slowdown. However, the Governor of the central bank was clear that inflation was still not where it needs to be, and there was “absolutely no room for complacency”.

The ECB meets on 26 October, while the BoE doesn’t meet now until early in November.

Keeping a close watch on oil prices

Finally, central banks are likely to be keeping an eye on global oil prices. The price of Brent Crude has jumped from a low of around $72 a barrel, to $93, on the back of production cuts by Russia and Saudi Arabia. On the one hand these may keep pressure on central banks should there be any resurgence in global inflation, but on the other, it could up the chances of a recession.

Important information

This information is issued by ANZ Bank New Zealand Limited (ANZ). The information is current as at 27 September 2023, and is subject to change.

This document is for information purposes only and is not to be construed as advice. Although all the information in this document is obtained in good faith from sources believed to be reliable, no representation of warranty, express or implied is made as to its accuracy, completeness or suitability for your intended use. To the extent permitted by law, ANZ does not accept any responsibility or liability for any direct or indirect loss or damage arising from your use of this information.

Past performance is not indicative of future performance. The actual performance any given investor realises will depend on many things, is not guaranteed and may be negative as well as positive.