New Zealand’s benchmark share index is down 17.5% so far this year, and the second half is expected to remain “challenging” as the impact of high inflation and rising interest rates filter through the economy.
Sharemarkets around the world have fallen over the last six months as central banks aggressively hike interest rates to curb inflation that has proved more persistent than expected following economic stimulus during the pandemic.
In the United States, the benchmark S&P 500 index is down 20.6%, its worst first half year since 1970, while Australia’s S&P/ASX 200 index is down 13.8% and the UK’s FTSE 100 index is down 2.9%.
“All of the major sharemarkets have had a very difficult first half of the year,” said Mark Lister, head of private wealth research at Craigs Investment Partners. Other assets like housing, bonds and cryptocurrencies are also in decline while commodities such as gold and oil have bucked the trend.
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Lister noted the declines followed sharp gains in asset values over the past two years on the back of ultra low interest rates and money printing programmes.
“Every asset class in the world went up dramatically, and now we’re just really giving back some of that as interest rates go back up again,” he said.
Lister expects the second half of the year to “remain challenging”.
“I would be hesitant to say that all of the volatility is behind us, but I think probably the worst of the volatility is behind us,” he said.
FINANCE AND EXPEDITURE COMMITTEE
Reserve Bank governor Adrian Orr discusses the risk of a recession in May.
The Reserve Bank started raising interest rates from a record low 0.25% in October last year. In May this year it increased the official cash rate to 2% and has forecast it will double it to 4% by the middle of next year as it seeks to regain control over inflation which is running at a 30-year high of 6.9%.
Lister said the full impact of interest rate increases was yet to flow through the economy as borrowers re-fixed mortgage rates as loans came due and adjusted their spending to reflect higher costs.
“That will filter through the rest of the economy in the form of lower activity, lower spending, and potentially higher unemployment,” he said.
Lister said there was a “strong possibility” that New Zealand would have a recession if the current conditions continued.
“It will be difficult to avoid,” he said.
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Mark Lister, head of private wealth research at Craigs Investment Partners, says it will be difficult to avoid a recession, which would hurt the sharemarket.
Central banks were trying to slow economies enough to knock inflation on the head, but not so much as to tip them into recession, he said.
“It’s just a super difficult balancing act,” he said. “It’s really easy to overplay your hand because it’s a blunt instrument, and imprecise.”
A recession is commonly defined as a decline in two consecutive quarters of gross domestic product.
The US may already be in recession, according to the Federal Reserve Bank of Atlanta’s GDPNow model, which signalled a 2.1% contraction in the second quarter after negative growth of 1.6% in the first quarter.
New Zealand’s economy contacted 0.2% in the first quarter, with second-quarter data due in September.
A recession would lower business profits and lead to lower share prices, although Lister noted the sharemarket had already factored in the risk.
Lister said he was feeling “pretty comfortable” about the outlook for the New Zealand market, as it included many stable, predictable businesses such as electricity companies, telecommunications companies like Spark and Chorus, and Port of Tauranga.
“I’m actually not feeling too downbeat on the local market,” he said.
“No business is completely immune to a downturn, but those types of businesses tend to hold their own much more than high-growth tech companies. We’ve got more of a safe, boring, predictable sharemarket than many other parts of the world so our market does tend to actually go okay during periods that are weaker.”
For long-term investors who were building their wealth, a downturn was a buying opportunity as prices were lower, he noted.
However most people were scared and made poor decisions like selling out at the bottom of the market, or gave up and put their money in the bank where it felt safer, he said.
“You’ve got to hold your nerve during the difficult times, and a lot of people aren’t very good at doing that,” Lister said.
“Someone who is a long-term investor and doesn’t need to call on this money for a reasonable period of time, I would say, you should be ignoring this sort of stuff and staying the course – and if anything, you should be getting set to buy more because you’ll do well.
“They’ll look back in hindsight and this will be one of those periods that has helped them build their wealth.”
