News » Market Update - April 2010
Market Update - April 2010
Global Shares
Poor performance in the UK and European markets over the month detracted from solid positive returns in US markets, resulting in a fairly flat return for global shares in local currency terms. Europe continued to feel the effects of Greek instability and also suffered as a result of the volcanic activity in Iceland.
Global share markets posted a negative return in NZD terms for the month of April with the MSCI index down 2.2% as the NZD showed strength against the USD and also on an MSCI weighted basis.
NZ and Australian Shares
NZ Shares made modest gains during April with the benchmark NZX50 index up 0.4% as stocks posted mixed returns for the month. Economic data released during the month showed the economy recovering slowly in line with expectations. First quarter inflation figures came out slightly behind market expectations but had little impact on the share market.
Despite some strong economic data, Australian shares produced disappointing results for the month, down 1.8% in local currency and nearly 3% in NZD terms as the Australian market reacted to news of fraud charges filed against Goldman Sachs, European concerns and possible restrictions on home lending from China. A few stocks bucked the trend, posting solid gains for the month, including Telstra (+6.4%) and Suncorp-Metway (+5.7%).
Interest Rates
The Reserve Bank maintained the Official Cash Rate at 2.5% following the announcement on the 29th, and market expectations still point to the first increase in June. April was a quiet month for interest rates in general with small shifts in government bond rates, and also in credit margins. Returns were steady for the month as running yields eclipsed most of these minor market changes.
Summary of Market Movements as at 30 April 2010
| Share Markets | 30/04 | 31/03 | 1 Month Return | 3 Month Return | 6 Month Return | 12 Month Return |
| NZX50 | 3,282 | 3,268 | 0.4% | 3.7% | 2.1% | 19.8% |
| ASX 200 (local) | 33,819 | 34,449 | -1.8% | 6.1% | 5.1% | 31.8% |
| MSCI (local) | 2,073 | 2,070 | 0.2% | 8.8% | 12.3% | 32.7% |
| MSCI (NZD) | 3,952 | 4,043 | -2.2% | 4.4% | 8.0% | 6.1% |
| Fixed Interest Markets | 30/04 | 31/03 | 1 Month Change % | 3 Month Change % | 6 Month Change % | 12 Month Change % |
| NZ 10-Yr | 5.92 | 5.98 | -0.06 | 0.29 | 0.19 | 0.61 |
| US 10-Yr | 3.73 | 3.83 | -0.09 | 0.15 | 0.35 | 0.62 |
| NZ OCR | 2.50 | 2.50 | 0.00 | 0.00 | 0.00 | 0.00 |
| Currencies | 30/04 | 31/03 | 1 Month Return | 3 Month Return | 6 Month Return | 12 Month Return |
| NZD vs USD | 0.7235 | 0.7097 | 1.9% | 2.6% | 0.9% | 21.7% |
| NZD vs AUD | 0.7801 | 0.7731 | 0.9% | -1.7% | -2.3% | 0.4% |
| NZD vs MSCI | - | - | 2.4% | 4.4% | 4.2% | 26.6% |
| Commodities | 30/04 | 31/03 | 1 Month Return | 3 Month Return | 6 Month Return | 12 Month Return |
| CRB Index | 275.3 | 273.3 | 0.7% | 3.7% | 1.8% | 23.8% |
| Oil | 85.2 | 83.8 | 1.7% | 16.8% | 10.6% | 66.6% |
| Gold | 1,167.4 | 1,113.3 | 4.9% | 7.8% | 12.2% | 31.0% |
Summary of Market Indices as at 30 April 2010
Government Stimulus Packages and the Global Economic Recovery
As the global financial crisis unfolded during 2008 and 2009, Governments around the world reacted quickly and firmly by implementing economic stimulus packages. These ranged from actions such as increased infrastructure spending, to one-off tax credits such as were implemented in Australia.
How big has the stimulus been?
With the total amount of fiscal stimulus running into the trillions of dollars, their size is best measured as a proportion of GDP, or total economic output. Data collated by the International Monetary Fund shows that most developed economies have run stimulus packages approaching 2% of GDP during 2009 and this is expected to continue during 2010.
What is the impact on government finances?
With consumer spending and business investment falling, this extra government spending has helped to prop up economic activity in the short-term and minimise disruption to the global economy. However, the cost has needed to be funded from Government budgets, at a time when lower economic activity has reduced taxation income and expenses such as unemployment assistance have also increased. The result has been pronounced budget deficits across the developed world, with the largest economy, the United States, being a case in point.
With budget deficits predicted to persist in the short to medium term, the level of government borrowing has necessarily increased in order to balance the books. The effect of this has varied across different economies, depending on the level of debt that countries had in place to begin with. Emerging economies are well-positioned in this regard, with public sector debt remaining relatively low, while in developed economies borrowings are expected to reach around 100% of GDP in 2010.
What are the implications for financial markets?
The increased level of government borrowing has put some upward pressure on global interest rates, although not to the extent that we originally expected. Higher levels of saving by consumers (who have generally focussed on reducing debt), combined with higher investment demand for government bonds as investors have become more risk averse, have helped to absorb the borrowing requirements for the time being. However, in some countries where public debt levels are higher than average (such as Greece) confidence in government credit worthiness has been shaken, resulting in markedly higher borrowing costs.
The inevitable wind-down of the level of government stimulus will provide some degree of a head-wind to the pace of ongoing economic recovery, as the reduction in economic support may not be immediately made up by consumers and businesses. It remains to be seen how much this will affect global economic growth. Less government stimulus is required in order to avoid an unsustainable increase in government debt levels. Although we do not expect the wind-down to pose a fundamental threat to the ongoing economic recovery, we remain cautious that the strong rally in sharemarkets may overstate the likely pace of improvement in company earnings. We therefore will continue to maintain the insurance protection in place over around 30% of your global shares sector.
(source: Deutsche Bank, Capital Economics)
Summary of Recent Key Portfolio Monitoring Decisions
Corporate Bond Portfolio
Following South Canterbury Finance's acceptance into the Extended Retail Deposit Guarantee Scheme, we took advantage of more favourable market pricing to remove the 2011 South Canterbury bonds from the portfolio. The proceeds of this sale, combined with maturity proceeds from Powerco bonds, were reallocated to BNZ senior bonds maturing in 2011 and Morgan Stanley floating rate notes also maturing in 2011.
Income Securities Portfolio
We also took the opportunity presented by favourable market pricing to remove the holding of South Canterbury 2011 bonds from the Income Securities Portfolio. The proceeds of this sale have been retained in cash to meet cash flow needs while we await further market developments in credit margins and the Official Cash Rate.
New Zealand Fixed Interest Portfolio
In order to mitigate the revaluation impact of rising short-term interest rates, we have added some temporary protection in the New Zealand Fixed Interest Portfolio in the form of an interest rate swap.