[Video: Question and answer session with Maaike Van Tol, ANZ’s Head of Asset Allocation, New Zealand.]
Maaike Van Tol: Well, over the last few months we’ve seen a bit of a change. There’s now the expectation that monetary policy will stay tighter for longer. Coming into this year, people expected a recession and that interest rates cuts would happen later on this year. Now that expectation has been moved into 2024.
Question: What have been the main drivers of this change?
Maaike Van Tol: Well, there’s been a few things really. First of all growth has been much stronger, especially in the US (United States). The latest Atlanta Fed GDPNow estimate is above 5%. So that’s really much too strong to expect interest rate cuts. And, second of all, inflations peaked in the US; it’s back down towards 3% but there are still a number of things that are keeping inflation higher which are a cause for concern. First of all, oil prices have reverted higher, second of all, inflation, shelter inflation is still very, very high. And it is coming down, but you know, there’s a question as to whether of not it will fully normalise. And lastly, wages inflation is still very high as well, and that puts pressure on services inflation. So, the inflation picture is still a bit concerning. And central bankers always say that monetary policy works with long and variable lags and that’s certainly what we’ve seen this year.
Question: What do you mean by monetary policy lag?
Maaike Van Tol: Monetary policy lag means that the length of time it takes between, when central banks start raising interest rates and when you start seeing the effect on the broader economy. It can be quite a long time; anything between 12 and 24 months. Now, we’ve been in a hiking cycle for longer than 12 months, but we’re not yet really seeing an impact of tight monetary policy on economic growth and on inflation.
Question: How does the situation in New Zealand compare to overseas?
Maaike Van Tol: Well, in New Zealand we’ve also been raising interest rates here very rapidly. And the Reserve Bank of New Zealand have said that they’ll keep interest rates at tight levels for a long time to get inflation under control. The key difference here is that inflation is higher, it’s currently at about 6%, which is higher than what we’re seeing overseas. So, the inflation situation here is a bit more concerning.
Question: Are there any outliers?
Maaike Van Tol: China’s probably the most notable outlier. There we’re seeing deflation or negative inflation, rather than inflation. There’s been some issues with property developers there and also an asset manager as well. So that’s clearly a source of concern. Youth unemployment is also high at above 20% and so their economic situation is much more concerning. And so, as a result the Peoples Bank of China have decided to start cutting interest rates, just a little bit. And that’s also in contrast to what’s happening around the rest of the world.
Question: How are we positioned for the current environment?
Maaike Van Tol: We’re overweight bonds. We think that with you know New Zealand interest rates being above 5% and you know, US (United States) being above 4.3%. That’s quite high levels relative to what we’ve seen over the last decade or so. So that’s certainly very attractive levels to be overweight bonds. On the equities side, we’re a little bit underweight. Tight labour markets, higher interest rate costs, tight credit conditions – all of these things put businesses under pressure and so we see valuations being slightly expensive given that fundamental view.
Published 22 August 2023. Information can change, is general, and not advice.
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