Data suggests good time to go global

Subdued iron ore prices are likely to take some of the gloss off Australian economic growth....
Subdued iron ore prices are likely to take some of the gloss off Australian economic growth. Photo by Reuters.

International equity markets continue to surprise, with strong gains in the United States after positive economic data.

Forsyth Barr broker Peter Young said it was a good time for investors to ''go global''.

Improving economic data and company fundamentals were the core supports for his positive view on international stocks.

''Growth stocks have been out of fashion for the last few months but should perform well in the coming phase of economic growth.''

The European Central bank cut its main lending rate from 0.25% to 0.15% and the deposit rate from zero to -0.1%, the first major central bank to introduce negative interest rates as a way of encouraging banks to lend money.

Mr Young said the ECB had probably delivered as much as it could, at this point.

President Mario Draghi said the central bank was not finished and was ready to ease more if necessary.

''Interesting, too, were the comments the lower boundary in interest rates had been reached and quantitative easing is still on the table.

"Apart from an unchanged ECB policy rate outlook, this suggests if this package won't fix the inflation problem, quantitative easing will become the tool of choice.''

Craigs Investment Partners broker Chris Timms said markets continued to push higher and prove the more cautious commentators and analysts wrong.

A combination of supportive central banking policies, steady economic data and a lack of investment alternatives had seen the theme of a steady upward grind continue over recent weakness.

Volatility had also been low, he said.

The VIX, a closely followed index measuring market volatility, hit its lowest level since February 2007 on Friday. The VIX finished the week at 10.73, down 22% from where it began the year.

''This very low level of volatility is one of the reasons some commentators are suggesting the market may have got just a little too complacent.''

Nine out of 10 Standard and Poor's 500 sectors rose last week with financials (up 2.3%) and industrials (up 2.2%) the strongest.

In the US, the May payroll was slightly below expectations but good enough to suggest employment growth was continuing.

The headline number of 217,000 new jobs was below the 235,000 consensus estimate and down on last month's revised 282,000.

The three-month moving average was now 234,000 compared with 236,000 previously, suggesting employment growth was stable, if not outstanding, Mr Timms said.

Across the Tasman, first quarter GDP growth in Australia was 3.5% on an annual basis, ahead of expectations of 3.2% and 2.8% in the previous quarter.

March quarter growth was 1.1%, ahead of a forecast of 0.9% and growth of 0.8% in December.

''This is the fastest pace of growth in almost two years and while it is encouraging, the Australian economy is likely to slow over the next few quarters and the economy remains challenged for many sectors.''

Iron ore prices remained subdued, mining investment was showing no signs of growth and the recent Budget would keep consumer sentiment weak in the short term.

The Australian Budget meant tax rises, healthcare spending cut, pension eligibility tightened and 16,500 public sector jobs cut, he said. It was hard to see consumer spending growing against that backdrop.


What to look for this week

Thursday: One more rate rise from Reserve Bank and then a pause. Market expectations for official cash rate to rise to 3.25%. The major piece of data this week in Australia will be unemployment and labour force numbers for May. Market looking for job growth of 19,800, higher than the 14,200 in April, and for unemployment rate to rise slightly to 5.9%.

In the UK, May employment is due early Thursday morning (NZ time), with markets expecting no change in the 6.8% unemployment rate from April.

Friday: US retail sales numbers due; markets expecting headline month-on-month rise of 0.5%, better than last month's 0.1%.

Local markets will have closed by the time China releases industrial production, retail sales and fixed asset investment for May. Markets expecting across-the-board improvement from April.


Go global
Three reasons to buy international stocks

• There is further growth to come in key economies. Monetary policy is still accommodative and was loosened further in Europe last week. This should support the return to growth in the European region. United States growth indicators continue to improve.

• Equities remain fairly valued. Equity prices still provide good value for risk and have room to move higher as rising demand drives stronger revenue growth and earnings upgrades.

• The New Zealand dollar is providing an opportune time to invest in high quality international companies and trusts, trading near its highs and well above its longer-term averages.


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