Ongoing pass-through of higher interest rates, slowing employment growth, weaker business investment, and softer global growth all paint a picture of broad-based weakness in New Zealand economic activity in the period ahead. 

The position of the US dollar as the world's reserve currency is an issue that pops up from time to time.  While the sheen has come off the Greenback in recent years, there is no real alternative.  Ultimately, it's all relative.  If the USD is to lose its influence as a reserve currency, something must rise in influence to take its place and we are a long way from that being the case.  Furthermore, such a change will be driven by structural forces that will take many decades to unfold.  We are not going to wake up to headlines one day that the era of US dollar dominance is over.

Growth resilience, core inflation persistence and ongoing monetary policy tightening have characterised the first half of 2023.

Relief at legislation passing through the US Congress to suspend the debt ceiling for two years belies the bigger issue of US long-term fiscal sustainability.  Indeed, many countries are now facing into increasing calls for new spending and/or tax relief while public debt is already on an unsustainable upward trajectory.  Even here in New Zealand, where our current debt position is more favourable than many, the challenges are just as great and will require our politicians to make some hard calls sooner rather than later.

• Despite an array of challenges, markets are becoming more comfortable with the future path of interest rates

• Near-term, this has allowed positive returns and some rebuilding from last year's widespread valuation declines

• Looking further out, investors will need to see more evidence that businesses are absorbing inflation pressures

• We see more scope for quality and reasonably priced defensive equity performance, as economies slow, and bonds stabilize

• As we anticipated, credit and default risks are becoming relevant as higher interest rates bite

• Diversification principles increasingly require greater portfolio agility, as bonds and shares are still moving together

• The bear markets in global equities and bonds petered out as 2022 ended.

• While damage to equity prices lasted all year, it was quite limited by historical standards.

• Now as markets tentatively recover, active security selection is vital, as risks remain.

• We see much better entry prices for Fixed Income and Property, continuing our focus on  quality portfolio yield.

Headline inflation may have peaked in many countries around the world, but the battle is far from won.  Core inflation is proving to be stubborn as second and subsequent rounds of price increases continue to flow through respective economies, while labour markets remain generally tight.  

In an inflation-prone period, when rising central bank policy interest rates have finally pushed up the offered rates for term deposits, what are the advantages of investing in an income-oriented managed fund?

The world is battling its most significant inflation outbreak since the 1970’s. Having missed the opportunity to get

in front of the problem, many developed world central banks are now tightening monetary policy aggressively.

Bevan Graham discusses latest New Zealand confidence indicators and muses on the extent to which the current weakness is due to temporary or longer lasting factors.  At the same time, inflation indicators continued to march higher, reinforcing our view that there is simply no justification for stimulatory monetary conditions right now.

The April edition of Salt’s Global Outlook reinforces our 2022 view of lower growth, higher inflation and more aggressive action from central banks.  Russia’s invasion of Ukraine has reinforced those trends.

Central bank credibility has taken a bit of a knock as the transitory inflation narrative has been proven wrong.

The 26th Conference of the Parties (COP26) in Glasgow ended with what is best described as incremental progress on new net zero targets, and a request for countries to strengthen their 2030 targets by the end of 2022. Economist Bevan Graham discusses what this means for firms, the economy and portfolios.

Salt Economist Bevan Graham argues that in months and years to come, as we look back at the history of the upcoming interest rate hiking cycle, we will likely reflect that the September 2021 meeting of the FOMC was the pivotal moment.  Bond yields are now in the next phase of their upward trajectory as the FOMC has become more realistic about the inflation outlook.

US fiscal debates are always fraught and have real consequences – in 2011 the debt ceiling impasse led to a US sovereign credit rating downgrade.  In this Salt Insights, Economist Bevan Graham looks at the current fiscal standoff.

Bevan Graham muses on the latest Covid lockdown, the economic outlook and what it means for the RBNZ.

Inflation and its structural forces: The big debate of 2021 has been the extent to which recently higher inflation would prove transitory or whether we were in for a period of more sustained inflation requiring a monetary policy response. 

After a tumultuous 18-months, deployment of the various vaccines around the world is allowing Covid-related social and economic restrictions to be gradually eased.  Global growth is picking up pace, aided by aggressive monetary and fiscal support.

Income Investment Funds: Taking up the strain? 

Income is a problem in New Zealand, and not just in the sense of investment income.

Salt Economist Bevan Graham takes a look at some of the recent activity data out of China.  The Chinese economy is recording spectacular growth rates off the low base of last year.  That said, challenges remain as the leaderships seeks to reorient the economy towards greater consumption to create a more prosperous society.

The long end of the US yield curve is currently selling off at a time when conventional wisdom suggests it should be rallying, while the yield curve should be becoming more inverted.  So, what's going on? And what are the implications for investors?

Technological change is not a new thing, but it does seem to be coming at us faster and faster.  The latest technological change evolution is occurring in Artificial Intelligence as ChatGPT ushers in a new era of generative AI.  This note looks at the economic implications of AI, as well as the opportunities and risks for investors.”

Two years ago, as we were starting the process of building out Salt’s global and diversified product range, we began by giving ourselves time to think about the world into which we were launching these products.  We wanted to know not only what opportunities lay ahead, but also what challenges would need to be navigated. 

• This is the first edition of what will be a regular quarterly publication focussed on the New Zealand economy.  Highlights this quarter:

• Downside factors still dominate the New Zealand growth outlook over 2023.  We expect annual growth to bottom out at -1.0% in the third quarter of this year.

• Net migration is surging higher.  This will lead to higher aggregate demand in the economy, but also help take the pressure off wages.

• The housing market appears to be stabilising in the middle of 2023.  Overall, we see a peak to trough decline of around 18%.

• The unemployment rate is expected to move higher over the next few months.  We see this peaking at 5%.

• Headline inflation is moving lower, though core measures remain sticky.

• The RBNZ has pushed pause on the rate hiking cycle.  We concur, but don’t expect interest rate cuts until the second half of next year.

Developed country central banks are close to pausing rate hikes.  If they’ve got it right, this pause should also be the peak.  However, we urge caution in expecting rate cuts to follow quickly.  Central banks will only move to cut interest rates once the broadest set of macro-economic conditions is consistent with lower inflation not only being achieved, but also sustained.  This may take longer than markets are currently anticipating.

China’s role as a source of global disinflation is drawing to a close. Unless it can unlock the answer to higher productivity that has thus far eluded most more developed economies, China seems destined to become a new source of global inflation. 

In an inflation-prone period, when rising central bank policy interest rates have finally pushed up the offered rates for term deposits, what are the advantages of investing in an income-oriented managed fund?

The economic case for an allocation to global listed infrastructure is becoming increasingly well understood.  We have had to think long and hard about the sustainability aspects of climate change and decarbonisation, in particular whether to exclude certain firms from the portfolio or engage with them to influence meaningful change.  

There has been no respite in the challenges confronting the global economy; supply chain disruptions remain intense, geopolitical tensions are rising, headline inflation continues to make new highs, and interest rate increases are accelerating.

Bevan Graham discusses the recent flattening of the US yield curve and looks at what similar periods in history suggest happens next, and when.  While the warning signs shouldn’t be ignored,  it’s too early to be worried about recession and too early to de-risk portfolios.

The war in Ukraine will have still uncertain but ultimately far-reaching implications for trade, growth and inflation, well beyond the immediate impact on commodity prices.

A constructive view on 2022 is built on the assumption of progressively fewer and less-paralyzing Covid disruptions to activity, allowing the global economy to continue to expand, supply congestions to ease, and for a more balanced growth environment to evolve. Over time, this should eventually dilute the inflation problem that is now challenging consumers and assets alike.

Global growth slowing, but above trend.
Economic growth continues to recover strongly, aided by the deployment of vaccines, the accompanying easing of social and economic restrictions, and strong and ongoing policy support.
 

New Zealand investors often believe that Listed Real Estate is an asset class they know fairly well. Our domestic capital markets’ history is dotted with property securities of various breeds and formats.

This Salt Insights paper looks at China’s recent regulatory interventions, putting them in the context of the country’s economic development history and its current economic challenges.  We also discuss the risks including our greatest concern that these regulatory interventions, while possibly well-intentioned at achieving common prosperity, may do more damage to aggregate prosperity.

The Appeal of the Real: is Listed Infrastructure an inflation vaccine? 

Confronted with unexpected and potentially persistent inflation for the first time in years, investors are being advised to diversify into real assets.

Geo-Political Risks: what to watch and the importance of active management.

As we look to the future and try to determine the outlook for economies and markets, we keep a keen eye on political developments. 

Bevan Graham and Sonya Fynmore discuss the increasingly urgent need for action on climate change and the important role fund managers have to play in supporting the necessary transitions to a more sustainable future.

The global growth outlook continues to improve as COVID vaccines roll out and economies continue to return to some degree of normal. There are risks on the horizon but in the near-term they appear evenly balanced.  The more medium-term risk centers on the inflation outlook and the extent to which higher inflation in the next few months is transitory, as central banks expect, or something more fundamental.  We are keeping an open mind.  For now, the "bull" narrative for equities remains intact, though we remain wary of further increase in bond yields.

The COVID pandemic is an event that has taken a considerable human, social and economic toll around the world.  The economic and social scars will likely persist for many years.