Over recent months, we have seen some dramatic ups and downs in the investment markets and it is common to see that many of the gains made in share markets have been given back. It is clear that the factors which previously drove the increase in investment values, and the economy in general, are weakening. This is reducing business and investor confidence, local house prices have been subdued, and it is unlikely that the New Zealand official cash rate (OCR) will rise in the foreseeable future.
Very little of this has come as a surprise to governments, investment managers and investors in general. We have had an almost unprecedented period of year-on-year increase in investment portfolios and it was inevitable that eventually the markets would need to take a breather and revalue back to long-term trend lines.
The points below are a summary of the consensus views of many of the economists and fund managers in New Zealand.
For New Zealand:
- The level of growth in the NZ economy will slow to the longer term trend lines and will likely be 2.5-3% year on year over the next 5-7 years (ANZ prediction).
- The slowing economy will likely see inflation stay low at around the 2% level. The economy is no longer a heated one.
- The official cash rate (OCR) will likely remain unchanged for at least the next 12 months.
- Business investment intentions are weakening and this will further reinforce a slowing economy.
- A potential concern is households get nervous with a declining or static house price situation and reduce their expenditure in an effort to live within their means.
- However, it is far from doom and gloom as the primary sector and exporters are doing well even though in many cases commodity prices are starting to fall.
- Global trade tensions and political challenges such as Brexit and Trump are causing nervousness within the markets and contributing to the big daily ups and downs in portfolio values.
- The US economy continues to see strong growth and this tends to moderate the slowing growth of China and Europe. As the US Federal Reserve increases interest rates, it is likely the markets will have a small hiccup as seen in the past month but they always readjust as they fully digest the implications of higher interest rates.
What all this signals is that the high investment returns we have experienced for the past 10 years are coming to an end, and markets need to readjust over time back to their long-term trends.