He believes that the great period of strong returns from the New Zealand sharemarket will come to an end due to slowing economic growth, the strong dollar and a downturn in net migration.He suggests economic growth will slow, possibly to around 2.5%.
“It is very unlikely company profits will continue to rise as rapidly as they did last year.”
He says a further 10% rise in the market this year would be a good result.
Internationally it is the same story of slowing economic growth, however he thinks that the international shares will continue to appreciate at “close to 10%” during 2005.
Caton says it is probably a good time for investors to put money offshore as the New Zealand dollar will come down off its highs at some point and there will be currency gains to be made.
The biggest risks for the international market are that the financial markets will get concerned about the United States’ twin deficits and that China does something unexpected and its growth story will end.
If the former happens “investors will reduce their appetite for US assets and the US dollar with the chance of major economic dislocation both in the US and elsewhere.”
The risks won’t disappear until the deficits are clearly on a downward trend.
“At least a risk-averse investor may choose to be underweight US assets.”
With China there is no sign yet of a hard landing, he says. In fact some forecasters suggest that economic growth may just taper off.
As long as China continues strong growth commodities and Australian resource companies should do well.
“It will be another interesting and uncertain year in which investment gains appear likely to be moderate,” Caton says.
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