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Market Commentary

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January was the second worst month on the NZX50 since February 2008

The reason for this reduction in prices is primarily due to increasing interest rates. The geopolitical situation between Russia on the Ukraine deteriorated. Global sanctions on Russia have driven up the prices of a number of commodities, namely oil. As a result, the Russian currency has fallen significantly. There are now fears of a run on the Russian banks and interest rates in Russia have increased from 9 to 20% to try and stop a financial collapse.

Locally, the Reserve Bank of New Zealand (RBNZ) has begun tightening credit conditions by increasing interest rates. The official cash rate (OCR) currently sits at 1.00% with economists predicting it will hit 3.50% by Q4 2023. Given the uncertainty in Europe, these predictions maybe too high and a slowing of any interest rate increases will be positive for the share market.

In light of the disruption that Covid is causing and the inflation rate in New Zealand being at its highest since 1990. This leaves the RBNZ no choice but to increase the OCR. Increasing the OCR exerts upwards pressure on market interest rates, lowering household disposable income, meaning less money to go to businesses in the economy and still further downward pressure on the market.

There has also been a slight change in the way in which the Federal Reserve of the United States views inflation. In short, they are running their economy “Hot”, which means sustained above average inflation.

The reason for this is they need a new way to remove the quantitative easing from their economy (money printing). Post the Global Financial Crisis (GFC), rates were raised too soon and the reliance on money printing remained. The last time the US economy sustained inflation at these levels was during the 1980’s.

To add to all this turmoil, at the end of 2021 house price inflation in New Zealand was at its highest in 20 years. This has in turn forced the Government & Reserve Bank to clamp down on investors. House prices have now started to fall with expectations of between a 7% and 12% reduction in house prices over the coming year.

Overall, interest rate increases in New Zealand will need to be balanced against a growing economy and fears of sparking a housing market correction. Stocks that have low growth and low relative yields will be repriced to offset higher rates.

The recent reporting season was robust, with most companies reporting as expected or slightly ahead of consensus. The recent reduction in share prices has uncovered a number of stocks that appear undervalued with some trading at 25% discounts to their Net Tangible Assets (NTA).

Contact your adviser if would like to discuss your portfolio and uncover some of the value currently on offer.


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