New Zealand’s stock market continues to rally ahead of tomorrow morning’s much-anticipated official cash rate (OCR) announcement.
The S&P NZX 50 is up 0.3% this week, with the gross index gaining 5.07% in the last 31 days and more than 21% so far this year.
Hamilton Hindin Greene investment adviser Jeremy Sullivan says the gains have been, in large part, because of the Reserve Bank lowering the OCR and changing its sentiment at the end of last year.
The market is pricing a 100% chance of an interest rate cut tomorrow, which would see the OCR fall to 2% – unless the central bank shocked the market with a 50 basis point cut.
“New Zealanders have $40-50 billion in term deposits rolling over each year. I don’t think people are going to be terribly interested in being offered the roughly 3% on offer over the next five years.”
He says people are seeing securities as more attractive, as even the relatively defensive ones can offer a rate “easily double” that of a term deposit.
First NZ Capital research analyst Chris Green says when looking at the length of equity market cycles in New Zealand since the 1970s, the current rally – which has been persisting for 88 months – is the second longest in that 46-year period.
“It’s well above both the median and average length of 22 and 34 months respectably recorded over the previous nine upturns.”
He says when taking into account recent growth rates, relative to its history and price to earnings ratios, it appears New Zealand’s equity market valuations are stretched.
“But short and long-term interest rate settings clearly remain supportive,” he says.
Mr Sullivan says he will be keeping a close eye on Reserve Bank governor Graeme Wheeler’s announcement tomorrow morning.
“If he makes comments about further cuts this year, that may push the equity market even higher.”
Westpac chief economist Michael Gordon is confident this will be the case.
“The strength of the language in that statement makes it all but certain the Reserve Bank will cut the OCR by another 25 basis points tomorrow, and it will signal a willingness to go further, he says.
“We expect the 90-day rate projections to imply a low point for the OCR of 1.75%, compared to 2% in the June MPS, paving the way for another rate cut in November.”