Equity markets have performed exceptionally well over the last few months (NZ50G Index +12% since the beginning of July) due to a welcome amount of positive expectations and good news. The German court passed a positive verdict on the European Central Banks stability fund, the Federal Reserve in the United States announced another round of bond buying, with an ongoing timeframe and the Dutch election result was pro-Europe. Closer to home, the NZ earnings season was positive from the point of view of higher dividend payments and earnings generally in line with expectations.
Whilst positive macro economic conditions can be beneficial for equity markets, stock selection remains a critical aspect in determining investment performance. This can clearly be observed by looking at the dispersion of returns across the NZ50 index over the last one, two or three years. Although many of the significant risks to the global economy are slowly being resolved, it is not our expectation that global economic growth will accelerate strongly. Therefore stock selection remains key rather than a thematic approach.
The United States Federal Reserves policy of continuous bond buying has a number of implications for investors. The first is the NZ dollar is likely to stay structurally stronger for longer and investors should be mindful of companies with a large amount of overseas earnings. Lower interest rates for longer will also likely keep dividends in the spotlight as investors continue to face income starvation from bonds, especially overseas.
Whilst equity markets may consolidate in the near term, higher dividend payouts, valuation support, reasonable expectations of growth and a number of risks behind us, the outlook for equities remains attractive over the next year. However, the global economy and investor sentiment remains fragile and share markets may remain volatile in the short-term.
Mark Warminger
Portfolio Manager