Globally it is a very mixed and somewhat complex picture. In the US, the election result provided no change. Obama is still President; the Senate is still controlled by the Democrats and the House in the hands of the GOP. 

The US equity market has taken this negatively and for all the hope the market had for presidential, business friendly change, it is now focussing on whether the Republicans and Democrats can come to a compromise over the so called fiscal cliff. 

In terms of company revenue and earnings in the US, we are seeing a somewhat softer period, no doubt affected by the uncertainty of fiscal measures. The US equities market has pulled backed, is under pressure and the US market is likely to go through a more volatile period again. 

In Europe the Euro is weakening again due to economic concerns as well and more uncertainty with regards to peripheral economies. A key issue is it appears that Germany is no longer insulated from Southern Europe’s problems. The latest industrial production figures from Europe and especially Germany were very disappointing. In Europe things seem to be getting worse. 

On the positive side is Chinas economy does appear to be stabilising. The latest data came in quite strong. Industrial production was up 9.6% year on year in October and Chinese retail sales came in at 14.5% growth year on year. The big focus now is the Chinese political transition and how this will affect the Chinese economy but one would expect a new government to be positively disposed to stimulating the economy, which could have positive flow on effects for NZ and Australia. 

In New Zealand the NZ50 was up over 3% in October, which was well ahead of global indices and the market rally continued despite a batch of soft New Zealand corporate and economic data. What is driving the gains is the attractiveness of New Zealand’s high dividend yielding stocks, which have been rerated post the positive dividend surprises seen in the last reporting season and as investors are forced to invest in higher yielding equities as bonds mature because of lack of new supply. 

Dividend yields should support NZ equity valuations until earnings growth recovers and whilst there still remains much uncertainty with respect to European sovereign debt issues, Chinese political transition and a slower growth rate in the US, NZ equities are insulated from most of these issues and have a number of attractive qualities.

Mark Warminger

Portfolio Manager