by Anthony Quirk
New Zealand based investors face the real prospect of an appreciating Kiwi dollar over the next few months, potentially decreasing their returns from offshore sharemarkets.
April illustrated this with investors hurt by the double whammy of weak overseas sharemarkets and a strengthening Kiwi against the US dollar. We may see a bounce in the former but the latter is a trend likely to continue for the rest of the year.
With the Kiwi dollar up significantly against the US dollar how investors handled currency hedging was crucial. For example, over the past three months an unhedged New Zealand based investor potentially experienced a currency loss of 7.8%, in addition to a 4.7% loss on the US equity market.
For most of the 1990s global investors have invested heavily into the US because of a high growth economy and sharemarket. This meant a high demand for US dollars and therefore a strong US currency. However, the combination of a very weak US sharemarket and a slow economic recovery has meant that global investors' investment into the US has slackened.
This, in turn, has led to the start of a fall in the US dollar. Combine this with the US's current account problems and the seeds are being sown for its decline.
In contrast in the past few years New Zealand's economy has experienced reasonable growth and a rapidly improving current account.
Taking these factors together means a likely continuation of the trend of a weakening US dollar for the rest of the year, meaning a move to the high 40's for the Kiwi is not impossible. However, we believe the US problems are short-term in nature and the long-term prognosis for its economy remains better than New Zealand.
This means that we expect a slide in the NZ dollar will eventually re-commence in the longer-term as our relatively poor economic growth rate impacts.
Apart from currency the other dominant theme was the significant decline in overseas sharemarkets. This was all about earnings disappointments with most US companies reporting profit decreases for their March quarter end results. While much of these were at, or above, (depressed) expectations most companies also reported a bleak earnings outlook and this was what really hurt the US market in April.
Going forward this means significant out performance potential for any company which can exceed earnings expectations. This suggests that after a long period where picking the market trend has been the key to out performing, stock picking may be the key going forward. This would be a return to the markets of the 1975-1982 period where the market was essentially trendless but good companies still produced reasonable returns.
In contrast, earnings growth for New Zealand listed companies has been quite strong. This is one of the reasons why our domestic sharemarket out performed its international counterparts over the April month. The NZSE 40 Gross Index was (only) down 1.3%, compared with the US and German markets which were down 6.1% and 6.6% respectively. Japan outperformed again in April although the sustainability of this recovery is questionable given depressed consumer confidence continues.
In April the Governor of the Reserve Bank of New Zealand (RBNZ), Don Brash, resigned. While he was not expected to go on to a fourth term when his third term expired next year, the timing of his departure was a surprise. However, it was very pleasing to see the complete non-reaction from the markets in terms of this. This reflects a newfound maturity for our market and is also recognition of the robustness of the monetary policy framework in New Zealand. It is also because the list of potential replacements is a strong one.
As predicted in last month's commentary April was a choppy period for shares with bonds providing their usual safe haven status. Global bonds were up 1.6% while domestic bonds produced 1.1% for the month, a stark contrast to the negative returns from shares. So in summary, a tough month to be in offshore equities but looking forward currency movements could be as significant a factor as underlying sharemarket performance over the next few months.
View report here. Anthony Quirk is the managing director of Guardian Trust Funds Management.Anthony Quirk is the managing director of Guardian Trust Funds Management.
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