We must acknowledge that the slowdown in the global economic outlook shall provide a significant headwind for the New Zealand economy. New Zealand’s financial system however remains sound and our major financial institutions remain well capitalised. The Reserve Bank (RBNZ) has taken steps to ensure that the banking system continues to function normally.
The 2020 Budget indicates Government commitment to operating an expansionary fiscal policy and intends to provide both targeted and broad-based economic stimulus. Tomorrow the country shall have to concern ourselves with how we shall pay back a greater debt burden, but today that cash stimulus will increase government spending which will end up with households and businesses.
Financial markets have responded to these events with declining global equity prices and falling corporate bond yields. Demand for New Zealand’s goods and services will be constrained, as will domestic production. Spending and investment will be subdued for an extended period while responses to COVID-19 evolve. Several factors will continue to assist and support economic activity in New Zealand & Australia, not least the benefits of successfully managing the health crisis flowing through into increased economic activity.
The New Zealand dollar has depreciated against our trading partners acting as a partial buffer for export earnings. On Wednesday (13 May 2020), the RBNZ kept the Official Cash Rate (OCR) at 25% having previously agreed to keep the OCR at this level for at least 12 months but announced an increase to its bond buying program.
Usually low interest rates might be cause for celebration, but with the economy facing uncertainty not too many are jumping to take advantage of the cheap money on offer.
To maintain our economies and provide some stimulus, governments globally have reduced interest rates even lower than they already were prior to the arrival of Covid-19. Most are now reluctant to look at negative interest rates. Therefore, assuming markets continue to function effectively the next tool to provide support and economic stimulus being widely promoted is large scale asset purchases of Government bonds as the next best monetary tool available.
The question given the current environment is who will be able to take advantage of our current set of circumstances? COVID-19 has magnified a longstanding problem, where do risk adverse investors turn to gain a return greater than the level of inflation?
There is some anticipation that with a worsening employment market and businesses struggling, that we are in for a period of deflation, reduced prices due to weakening demand. This may make bank deposits more attractive and some banks are offering comparatively attractive term deposit rates to lock in their funding commitments and gain market share. Credit spreads on some corporate bonds have also expanded which brings the fixed interest market back into play.
Property trusts are no longer proving a haven for yield hungry investors, although it is expected that those property trusts with industrial/commercial exposure will continue to generate steady returns from tenants providing essential/safe services. Property trusts are generally leveraged and will benefit from reduced financing costs.
Shares that can provide steady dividend yields are becoming increasingly valuable as businesses with exposure to tourism, retail and discretionary consumer spending suffer under the weight of Government restraints. These are likely to be found with companies that have security of revenue streams and solid balance sheets are likely to take measured advantage of the availability of cash.
It’s a mixed bag for property investors. The current environment works well for those that have a secure revenue stream to service loan costs. Many however don’t have confidence in their revenue outlook. When property owners do get to re-fix their mortgage rates their servicing costs should come down.
Leading into COVID19 the expectation was that property prices would rise over the next 12 months by approximately eight to ten per cent. This has now been quashed as the stark reality that we could be entering a protracted recession hits home. The lowering of interest rates should provide a cushioning effect to a dip in overall property price increases.
Our expectations are that property prices shall observe a short sharp dip, before stabilising through the summer of 2020-2021. By the Autumn of 2021 prices should be on the rise again. Significant differences should be observed by region as impacts of Covid-19 hit especially hard on areas overly reliant on tourism, and people moving about, which shall be curbed by our strict border controls.
This article reflects general views and opinions of Maxim Financial Markets Limited at the time of publication. Nothing within the article should be relied upon as a basis for making any investment decision. Please contact us to seek specific investment advice before making any investment decision. A Financial Advisor disclosure statement is available upon request.