The global economy has steadily improved in recent months
and this year starts on a much more solid foundation than seen
for some time, Craigs Investment Partners broker Greg Easton
Growth in most regions was stable, if not accelerating;
central banks remained committed to providing support where
necessary and the corporate world was growing earnings.
However, the recovery was still fragile and in the coming
year returns could be more modest than last year's, he said.
The Federal Reserve had started reducing its bond-buying
''While this is a very positive and sensible step towards a
more normal set of policy conditions, it may cause volatility
as it occurs,'' he said.
The World Bank this week raised its forecast for global
growth for the first time in three years as advanced
economies started to pick up pace, led by the United States.
The rosier outlook suggests the world economy is finally
breaking free from a long and sluggish recovery after the
global financial crisis.
The poverty-fighting institution predicted global gross
domestic product (GDP) would expand 3.2% this year, from 2.4%
in 2013, according to its twice-yearly ''Global Economic
Prospects''. In the bank's last forecast in June, it expected
global growth to reach 3% in 2014.
The bank said the global economy had reached a ''turning
point,'' as fiscal austerity and policy uncertainty no longer
weighed as heavily on most richer economies. The bank
expected stronger growth in the United States in particular,
of 2.8% in 2014, from 1.8% last year.
''For the first time in five years, there are indications
that a self-sustaining recovery has begun among high-income
countries, suggesting that they may now join developing
countries as a second engine of growth in the global
economy,'' the bank's chief economist, Kaushik Basu, said in
Mr Easton said New Zealand faced the prospect of rising
interest rates and a general election later this year.
The former would slow house price growth and increase
borrowing costs and the latter would lead to some
uncertainty, particularly given how close the polls suggested
the result would be.
On balance, there were more positives than negatives,
although with many of the major equity markets having
produced ''outstanding returns'' of between 20% and 30% last
year, the pace of gains was expected to slow this year, he
The outlook for the New Zealand dollar remained tied to the
actions of the Fed in coming months. If the Fed continued to
reduce stimulus steadily this year, as Mr Easton believed it
would, the New Zealand dollar should gradually decline
against the US dollar.
''Against the Australian dollar, we expect recent strength to
continue over the short-term, although we may have seen the
most dramatic of those moves already.''
The official cash rate would almost certainly increase in the
first half of the year, and the first move was likely to be
in March, Mr Easton said.
The consensus view was for increases of between 0.75% and 1%,
which would put the cash rate at between 3.25% and 3.5% by
the end of next year, compared to the current 2.5%.
The only potential threat to whether the central bank would
go ahead with those forecast rate hikes appeared to be the
''stubbornly strong'' kiwi. If the Fed announced further
tapering in either January or March, that should not be an
issue, he said.
Listed property offered a solid income outlook with dividends
at sustainable levels and an average gross yield of more than
8%. That should keep the sector well supported, although
interest rate rises could see yield investors placing less
relative value in high-yielding entities.
As the economy gained further momentum, there might be some
increases in property values and the prospect of some
much-needed rental growth might emerge, Mr Easton said.
''We have a positive view on equities over the coming years.
The local economy is gaining momentum and 2014 is expected to
be a strong year in terms of growth. Our corporate sector is
in good shape with low debt levels. Forecast earnings growth
are close to 10% for the next 12 months, with an average
gross dividend yield of nearly 6%. These factors should all
keep our market well supported.''
Craigs remained positive on global equities, including
Australia, at current levels and saw potential for some of
those offshore markets to perform better than New Zealand, he
The high dollar also provided an opportunity to add to
offshore holdings, particularly as there could be some
weakness creep into the New Zealand currency as the Fed
continued its tapering process.