Tactical Thoughts - February 2019
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Tactical Thoughts – February 2019
Equity markets around the world rose in January with the MSCI World Index rising +7.8%, the
largest monthly move since October 2011. Sentiment shifted markedly after the US Federal
Reserve announced caution on any further interest rate rises. Much of the market volatility over
the last twelve months has been indirectly attributable to concerns about the path to higher
interest rates. By signalling a pause, the Fed has underpinned a renewed sense of investor
confidence that they will back‐stop any material fall in asset prices.
New Zealand equities participated in the global rally but by a smaller magnitude. The benchmark
NZX50G returned +2.0% in January and has almost retraced all of its losses since last
September’s record high. Defensive yield names were well bid, buoyed by the prospect of lower
interest rates while at the same time growth stocks like a2 Milk were also firmer. Tourism related
stocks fell after weaker than expected net migration figures and slower inbound tourism were
reported. Air NZ in particular announced a material drop in 2019 earnings expectations and the
stock fell sharply as a result.
The S&P/ASX 200 advanced +3.9% in January as energy stocks delivered a strong performance
buoyed by the recovery in oil prices. Financials continued their slide with banks dragging the
sector lower ahead of the release of the recommendations from the Royal Commission. The
report was released in early February and on first impressions, appears to be more benign than
many thought it would be. Fortescue Metals Group (FMG) was the best performing stock on the
Australian exchange, rising +35.1% after the release of a solid quarterly update. Much of the
move though was likely to be attributable to spiking iron ore prices after Vale, the world’s largest
producer, reported a large dam failure in Brazil that will take a considerable amount of supply
out of the market.
US equities (S&P 500) racked up their best January since 1987 on the back of a more subdued
Fed Chairman and optimism regarding US‐China trade talks. The Fed signaled it would be patient
on interest hikes and flexible on reducing its balance sheet which encouraged sentiment. The
more dovish turn eased fears that the Fed would continue to hike even if the economic data
pointed otherwise. Energy and industrials were the best performing sectors while technology
stocks lagged after Apple announced poor results, hurt especially by the slowdown in China.
The UK saw ongoing political tension as it inches closer to its agreed March deadline to exit
the European Union. The FTSE 100 lagged last month, as Brexit remains a source of uncertainty,
especially given weak leading economic indicators for Europe most notably in Germany. The UK
parliament rejected a Brexit proposal from Prime Minister May and the market must still wait
for a resolution.
China remains an area of focus for global investors. Weak manufacturing data was reported early
in the month but slower growth also led to more stimulus, including a reduction of the required
reserve ratio (RRR) and a promise of tax cuts and additional government spending. Investors
interpreted these stimulus measures as a positive which supported global growth expectations
and risk assets.
1 of 6
We have seen a significant shift take place in 2019 for the outlook for global interest rates, in part
as a response to the US Federal Reserve Chairman’s comment that they are now sitting at a
neutral level in terms of their current interest rate setting. The result being that markets are not
pricing in any interest rate increases for 2019 in any of the developed economies. In fact,
Australasian markets are now mostly pricing in an interest rate reduction within the next 18
months. Despite record low rates, we prefer holding fixed income instead of cash, as
bondholders receive a higher yield especially if we were to see a lower official cash rate.
ASB announced to the market that they were repaying at par ($1.00) retail investors who hold
either the ASBPA or ASBPB Perpetual Preference Shares. These securities which total NZ$550m
have been outstanding since 2002 and have traded in an extremely wide range due to their
structure and perpetual nature. This is a timely boost for investors as they were trading around
the ~0.85 cents level at the time of the announcement and this sign of ‘good faith’ does seem
to tie in coincidentally with the Banking Royal Commission that has been on‐going across the
Tasman.
Markets have bounced materially off their fourth quarter 2018 lows, and one might argue that
investors who added to their holdings and essentially bought the dip have proven to be correct.
We would agree to an extent but we would also say that the evidence appears to be pointing
that we are towards the later stages of the current economic cycle. An investment manager was
in our office earlier this month, and he relayed a recent interaction with a highly‐regarded NZ
CEO, who had said to him “we are in year 11 of a ten‐year property cycle”. We feel the same
could be said of equities and think it is prudent to be more cautious at this point in the
investment lifecycle. At the same time, this should be balanced with the belief that there will
continue to be rewarding opportunities for clients to participate in.
Asset allocation remains key, and sticking to one that matches your risk profile is the best way to
achieve your investment goals as the next phase starts to form. The fixed income pipeline for
primary issuance looks strong in 2019 which will provide a number of compelling opportunities.
Likewise, 2018 saw several takeover deals of local companies and we see this trend as
continuing. Domestic IPOs with the exception of Napier Port look few and far between this year,
however private equity funds continue to raise capital and deploy it across the local mid‐market
space. We expect a blue‐chip private equity manager to begin marketing a follow‐on fund in the
coming months so please reach out to your adviser if you would like to learn more.
We are excited by the current opportunity set and believe the next down‐cycle is not around the
corner just yet. We expect 2019 to have further chances for wealth creation in both equities and
fixed interest and we encourage clients to not let short‐term market gyrations distract them
from their long‐term investment goals.
2 of 6Recommended Tactical Asset Allocation
Underweight Overweight
Asset Class Tactical Rationale
NZ Equities We retain our Neutral recommendation on New
Zealand equities. We see a slowing economy and
rising policy uncertainty as risks but despite this
believe there are attractive individual names to own.
Australian The Royal Commission and US/China trade dispute
Equities has had a harmful impact on sentiment and we stick
to our Moderately Underweight recommendation.
US Large Cap US GDP growth is likely to slow in 2019 but corporate
Equities earnings growth should remain resilient. It is late in
the cycle but we still see opportunities before markets
move to the next phase.
US Small Cap With the Fed now on hold, deregulation and tax
Equities reform continue to be tailwinds for US small caps, and
therefore have become constructive again.
Developed World Brexit has dominated the headlines in the UK and
Equities Europe and clouded the near‐term outlook. Japan is
leveraged to a strong US but heightened volatility has
made investing in this market challenging.
EM Equities Emerging Markets appear to have bottomed and have
benefitted from sizeable net fund inflows. We prefer
Asia. Chinese equities should benefit from a
resolution to trade tensions or stimulus measures.
NZ Listed Revaluation gains and lower debt serving costs have
Property helped to keep gearing levels in check. Limited growth
opportunities however underpin our Neutral rating.
Fixed Interest Fixed income remains supported despite an increase
in supply. We stay Neutral as the sector balances
historically low interest rates domestically against
safe‐haven demand from rising equity volatility.
Cash With the RBNZ explicitly stating their desire to keep
short term interest rates at low levels, we see little
benefit in holding large quantities of cash.
3 of 6Market Price Earnings ratios
Price Earnings ratios 2013 – 2019*
*Price/Earnings Ratios are Bloomberg Best estimates for forecast year one.
Price Earnings ratios versus average*
NZ Australian US Large US Small Cap Developed EM
Price Earnings*
Equities Equities Cap Equities Equities World Equities
As at 31 January 20.8 15.2 16.3 21.9 12.9 12.0
10‐year average 17.4 14.9 16.2 26.2 14.1 12.1
5‐year average 19.6 15.9 17.9 26.9 15.0 12.3
*Price Earnings ratios are Bloomberg Best estimates for forecast year one.
FX Returns to 31 January 2019
NZ$ FX performance percentage returns to 31 January 2019
Currency Pair 1m 3m 6m 12m
NZ$/ US$ 2.9% 6.1% 1.4% ‐6.1%
NZ$/ AU$ ‐0.3% 3.2% 3.6% 4.0%
Source: IRESS, Bloomberg, January 2019.
4 of 6Index Returns to 31 January 2019
Index percentage returns in their currency
Asset Class Index 1m 3m 6m 12m
NZ Equities S&P/NZX 50 Gross NZ$ 2.0 2.7 0.7 6.4
Australian Equities S&P/ASX Accumulation 200 AU$ 3.9 1.5 ‐4.6 1.4
US Large Cap Equities Russell 1000 Total Return US$ 8.4 0.5 ‐3.0 ‐2.2
US Small Cap Equities Russell 2000 Total Return US$ 11.2 ‐0.4 ‐9.6 ‐3.5
Developed World Equities MSCI EAFE* US$ 6.5 0.9 ‐8.7 ‐15.0
EM Equities MSCI EM* US$ 8.7 9.8 ‐3.5 ‐16.3
NZ Listed Property S&P/NZX Property Gross NZ$ 1.8 7.5 8.0 13.6
Fixed Interest S&P/NZX Corporate A NZ$ 0.6 1.4 2.9 5.0
Cash ANZ New Zealand Call Rate NZ$ 0.1 0.4 0.9 1.8
Source: IRESS, Bloomberg, January 2019 (*not total return index).
Index percentage returns translated into NZ$
Asset Class Index 1m 3m 6m 12m
NZ Equities S&P/NZX 50 Gross 2.0 2.7 0.7 6.4
Australian Equities S&P/ASX Accumulation 200 4.2 ‐1.7 ‐7.9 ‐2.5
US Large Cap Equities Russell 1000 Total Return 5.3 ‐5.3 ‐4.4 4.2
US Small Cap Equities Russell 2000 Total Return 8.1 ‐6.2 ‐10.9 2.7
Developed World Equities MSCI EAFE* 3.4 ‐4.9 ‐10.0 ‐9.4
EM Equities MSCI EM* 5.6 3.5 ‐4.8 ‐10.9
NZ Listed Property S&P/NZX All Real Estate 1.8 7.5 8.0 13.6
Fixed Interest S&P/NZX Corporate A 0.6 1.4 2.9 5.0
Cash ANZ New Zealand Call Rate 0.1 0.4 0.9 1.8
Source: IRESS, Bloomberg, January 2019 (*not total return index).
Macquarie Interest Rate and FX Forecasts
Rate 4Q2018A 1Q2019E 2Q2019E 3Q2019E 4Q2019E
Australia Cash Rate 1.50 1.50 1.50 1.50 1.50
Australia 10yr govt 2.70 2.80 2.90 3.00 3.10
US Fed Funds Rate 2.25 2.50 2.75 3.00 3.25
US 10yr Treasury 3.03 3.35 3.55 3.75 3.75
NZD OCR 1.75 1.75 1.75 1.75 1.75
NZ 10yr govt 2.65 2.75 2.85 2.95 3.10
NZ$/ US$ 0.6600 0.6600 0.6600 0.6700 0.6800
AU$/ US$ 0.7100 0.7000 0.7100 0.7300 0.7400
NZ$/ AU$ 0.9296 0.9429 0.9296 0.9178 0.9189
EUR/ US$ 1.1200 1.0900 1.1000 1.1100 1.1200
US$/ JPY 112.00 110.00 109.00 109.00 106.38
GBP/ US$ 1.2500 1.3300 1.3500 1.3700 1.4000
Source: Macquarie Securities, January 2019.
5 of 6General Disclaimers
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The disclosure statements for Hobson Wealth and your adviser are available free of charge by contacting us on 0800 742 737. Hobson Wealth is not
a wholly owned subsidiary of Macquarie Group Limited (MGL) but MGL holds an interest in, and provides certain business and research services to,
Hobson Wealth. There is also a security distribution agreement in place between MGL and Hobson Wealth.
This document contains market commentary and factual information or class advice only. It is not research. Nothing in this document shall be
construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. The information in this
document does not take account of any particular person’s objectives, financial situation or needs. Before acting on this information, investors should
therefore consider the appropriateness of the information having regard to their situation. We recommend investors obtain financial, legal and taxation
advice before making any financial investment decision. The views contained in this document may not constitute the views of Macquarie Group
Company. While we believe the information to be accurate and any recommendations to have reasonable basis, no warranty is made as to the accuracy
or reliability thereof. There are risks involved in securities trading. The price of securities can and does fluctuate and an individual security may even
become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and
international stock market or economic conditions, which may adversely affect the value of the investment. The forecasts are predictive in character
and therefore investors should not place undue reliance on the forecast information. Whilst every effort has been taken to ensure that the assumptions
on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and
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Disclosures
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www.macquarie.com/disclosures.
Contacts
For more information, call us on 0800 742 737 or visit our website at hobsonwealth.co.nz
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