Harbour takes a cautious approach as downside risks increase

Lead economic indicators continued to weaken and uncertainty around trade negotiations dragged on during September. It was against this uncertain backdrop that global equity markets fell 2.0% (in local currency). New Zealand equities held up comparatively well, down -0.9%, with higher yielding companies faring best after the RBNZ’s surprised 50bp cut to interest rates. Australia suffered the brunt of falling commodity prices, down 2.4% (in AUD).

Global data has generally disappointed relative to expectations recently, particularly in Europe and China. Chinese July activity and credit data suggested renewed weakness with industrial production growth the lowest in 17 years. The US also showed signs of weakness with an unexpected contraction in the ISM Manufacturing PMI which was released in early September.

Despite the weakness in the US manufacturing sector the US consumer, the key driver of US GDP, still looks in relatively good shape with ongoing jobs growth and low interest rates leading to buoyant confidence surveys. US companies have also shown little sign of slowing with earnings season widely being regarded as a success. Of the 495 companies that reported earnings, 375 (76%) delivered positive earnings surprises. However, guidance was less upbeat, painting a less rosy picture of the road ahead.

The New Zealand and Australian August company profit reporting season for the June period saw more earnings beats than misses against consensus expectations. Post result earnings revisions have seen more consensus earnings downgrades than upgrades and there were more negative than positive outlook statements from companies than we have seen in recent years. Company caution generally reflected global economic uncertainty and trade negotiations. At an underlying company level, actual operating activity remained sound.