News & Opinion

Let's be careful out there!

6 June 2018

Let's be careful out there!


We spoke to one of the most highly regarded Kiwi economists, former chief economist for ANZ and owner of Bagrie Economics, Cameron Bagrie, on how he sees the next 12 to 18 months playing out offshore and in Godzone.

Let’s be careful out there’ was the catchphrase for Hill Street Blues.  Those who have been around a bit will remember the show.  It’s probably an appropriate tag line for investing at the moment. Investing is getting tougher.  Investors should always do their research.  It’s even more imperative now. 

The US Federal Reserve (Fed) is lifting interest rates.  Global debt statistics are getting more attention; global debt has hit 225% of GDP.  Emerging market economies in areas such as South America that have borrowed heavily are under the spotlight.  Some have had to lift interest rates significantly to defend their currencies against US strength.  Argentina has gone to the International Monetary Fund for help.  Rising interest rates and a lot of debt is a bad combination.  

Valuations are lofty.  Statistically the global economy is due some sort of downturn, if the historical 10-year pattern is any guide.  The protectionist breeze is blowing stronger, which is not good for trading nations such as New Zealand, oil prices have crept up (there is both good and bad in that), populism is driving policy in the likes of Italy which is of concern for Europe, and geopolitical spats are rife. 

It’s far from one-way traffic, however.  The Fed is lifting interest rates for good reasons; growth in the world’s largest economy is robust and unemployment has fallen to 3.9%.  The Fed may be hiking but other power-broker central banks such as the Bank of Japan and European Central Bank are not.  Corporate earnings around the globe are good. 

We want interest rates to move up from levels seen after the global financial crisis, with rates still negative in some parts of the globe.  Extraordinarily low and negative rates in some countries is not a sign of economic health.   Of course, we don’t want interest rates to move too far such that it derails the global expansion.  That’s a tough balancing act to strike.

"New Zealand is not immune to global forces.  Valuations are stretched across many asset classes and credit is harder to come by. Locally, investors are facing other challenges as well."

The housing market is facing huge changes.  Affordability is becoming more of an economic and social issue which takes it into the political arena.  The ability of investors to offset property losses against other income is being removed.  A capital gains tax is around the corner.  The bright-line test has gone from two to five years.  Landlords are facing additional costs as requirements to provide healthier homes increase.  Foreign buyers are less welcome. 

The dairy sector is being hit with pending environmental taxes (water, nitrogen, carbon); shifts in freshwater regulations and mycoplasma bovis.  We are at “peak cow”. But it’s not all bad.

The commercial property sector is not immune but at least it’s not getting the same degree of policy-maker attention.  It’s somewhat outside the political sensitivities of affordability and the environment (though not completely so in regard to making buildings more environmentally friendly). 

Vacancy rates are low across the commercial sector, particularly in Auckland.  The New Zealand economy is still performing solidly, despite low levels of business confidence, and economic growth is a key driver of the commercial property sector.   The Reserve Bank and Treasury are both expecting the New Zealand economy to perform solidly over the coming years amidst the obvious global risks. 

Capacity constraints are constraining the construction sector which makes life favourable for the existing stock of assets.     

One of the world’s leading investment firms (Blackstone) just signed to buy $635 million of assets in Auckland.  That’s a huge shot in the arm for investor confidence and New Zealand’s economic story.  

Our own central bank does not expect to lift interest rates until late 2019 or 2020.  
We are however, what economists term ‘late cycle’.  It always pays to be vigilant - more so ‘late cycle.’    Seek diversification. 



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