European Central Bank president Mario Draghi is likely to remain supportive of equity markets in the medium term. Photo by Reuters.
Most markets performed respectably in the first half of
the year with the NZX50, in New Zealand, posting the
strongest return in the six months to June 30. Business
editor Dene Mackenzie talks to Craigs Investment Partners
broker Chris Timms about the first six months and what he
expects for the rest of the year.
At the start of the year, expectations another rally of the
magnitude of last year seemed unlikely, Craigs Investment
Partners broker Chris Timms said.
However, it was a year of solid gains for equities, given
economic growth was accelerating in most regions and earnings
growth was likely to be robust.
United States, Australian and New Zealand shares had
performed as expected, while emerging markets were
United Kingdom and European shares lagged, he said.
''We remain positive on global equities, including Australia,
at current levels and see potential for offshore markets to
perform better than our own.''
The high New Zealand dollar also provided an opportunity to
add to offshore holdings, particularly as some weakness could
creep into the currency as the US Federal Reserve ended its
quantitative easing programme in late October, and as the
pace of domestic economic growth passed its peak.
The investment case for equities remained solid on a 12-month
view and total return basis, Mr Timms said.
While the current environment exhibited a few concerning
signs - high government debt levels, stubbornly high
unemployment, artificial central bank support and high
valuations - every major region was expected to experience
positive economic growth and for corporate earnings growth to
''It is difficult to see a significant market correction
taking place when growth is gaining momentum and while
earnings are growing steadily.''
In the short term, perhaps the next three months, there was
potential for volatility to re-emerge and market weakness to
That would come on the back of full valuations, geopolitical
risks, rising interest rates in the US and investor
complacency, he said.
Applying some caution in buying shares should be considered,
along with taking profits in higher-risk positions or
reducing holdings that had become larger than they were
intended to be, Mr Timms said.
New investors would be encouraged to be patient, selective
and cautious in their investment approach over the short
Global economic growth was positive for the coming years.
Between 2014 and 2016, expectations were for every major
region to experience positive growth.
Regions forecast to experience the strongest growth were the
US, the UK, New Zealand and Australia. China was expected to
grow strongly, although at a more moderate level than in the
past two decades.
Europe and Japan were forecast to grow but at a much slower
Europe had many issues to work through while Japan was
plagued by demographic challenges.
As was the case with economic growth, corporate earnings
growth was expected to accelerate over the coming two years.
Of the five key regions, the US, Europe and Australia were
expected to experience the strongest growth. New Zealand was
expected to see more modest earnings growth although Mr Timms
argued it could probably be relied upon as more achievable
and more insulated from the risks that could emerge across
Europe, the US and Australia.
Some markets had been tracking broadly as expected, such as
New Zealand, Australia, Europe and the UK. However, the US
and the emerging markets had been surprisingly strong, both
reaching year-end targets within the first half of the year,
UNITED STATES - current view
US equities had a solid outlook as the economy continued to
recover and earnings growth remained robust. Value was harder
to find after a strong performance. The Federal Reserve was
expected to remain supportive over the medium term although
much less so than in the past as quantitative easing ended
and interest rates potentially increased from current
near-zero levels. For New Zealand investors, the bright side
of any such changes would be a potentially stronger US
EUROPE - current view positive
Europe continued to exhibit risks, although the worst
appeared to have passed and opportunities existed in
equities. The European Central Bank was likely to be more
accommodative in future, supporting the market in the same
way the Federal Reserve had done in the US.
UNITED KINGDOM - current view
The UK market looked good value, had attractive yields and
was showing signs of economic stabilisation amid a stronger
housing market and a more robust labour market. While
economic growth and earnings growth remained muted, on
balance, there were opportunities in the region, particularly
if the central bank moved to a tightening bias and the
consequential impact on the New Zealand dollar relative to
the British pound.
EMERGING MARKETS - current view
Emerging market economies had stronger demographics than many
Western nations and excellent long-term growth outlooks.
Craigs had a positive view on the outlook for emerging
markets although, in the short term, there was further
volatility coming. Investors had enjoyed significantly higher
returns in developed economies than in emerging economies in
the past five years. Emerging market valuations had become
to ignore. Investors should add exposures in emerging markets
both directly and through companies selling into emerging
economies. It should be acknowledged risks were higher than
for developed markets and there was potential for greater
AUSTRALIA - current view
Australia looked reasonable against the backdrop of a lower
currency and lower interest rates, the latter of which should
keep yield stocks well-supported. Consumer spending was
likely to remain constrained following a tough Budget and the
economy generally beholden to the mixed outlook for China.
NEW ZEALAND - current view
Attractive dividend yields should support the market, while
the Canterbury rebuild and strong migration would keep the
outlook for the economy robust. High-quality companies
continued to post solid results and the local market remained
a low volatility place to invest. Craigs was comfortable with
New Zealand equities although value was difficult to find and
investors should look for weakness to accumulate holdings.