Wednesday 6 November, 2019
I spent a good chunk of September at conferences in London and New York doing due diligence on our foreign investments as well as visiting our brokers. It was hard to reconcile a London skyline full of cranes, a city in renewal, its pubs and restaurants full, with the very real fears of a hard no-deal Brexit by the end of October. Those fears, stoked by the shutting down of parliament in early September, were somewhat allayed by the Supreme Court judgement against the closure mid-month. Nevertheless, Brexit uncertainty is clearly having a corrosive effect on continental Europe which, moreover, is also being buffeted by the Trade War. European and UK companies seem to be keeping a stiff upper lip, but it appears that massive automatic new tariffs in the event of a no-deal Brexit could be the last straw in already challenging markets. It was therefore unsurprising that the European Central Bank cut its interest rate 10 basis points to -0.5% (yes that’s negative) and announced a further quantitative easing/money printing exercise.
New York City had a similar vibe to London but the stories the companies were telling were significantly more upbeat. US consumers haven’t stopped consuming and banks are in great shape not seeing any material pick up in bad loans. Telecom companies were all gung-ho on the rollout of the 5G technology which, among other things, will bring us autonomous cars. All very uplifting to long term interest rates as well which rose accordingly with higher expected inflation. Indeed, while the Fed did in fact cut its overnight rate 25 basis points to a 1.75-2.0% range as expected, it tried to convey it as just a mid-cycle adjustment, much to the consternation of Mr Trump. Nevertheless, the positive sentiment soured somewhat towards the very end of the month as economic numbers began to show that the US is not immune to the global slowdown. While we believe this was inevitable, we do believe that the Fed has much more that it can do in the way of interest rate cuts in the next 12 months.
So what might this mean for New Zealand? Our long term interest rates followed the US up... but to a lesser extent. Meanwhile, noises from the Australian economy are still pretty weak, with business sentiment continuing to weaken. The Reserve Bank held back from a September OCR (Overnight Cash Rate) cut from its current 1.0%, but pundits are expecting another two cuts (and
possibly more) by next year.
Caution continues to be our watchword given the economic environment. While now is not a great time to buy company bonds, it does provide breathing space to discover opportunities, and buy when the time is right.
And if you're wondering when that is... it could be time to talk to the 'global-focused locals' on our 100% Kiwi team!