Today's Top 10 is a guest post from Christian Hawkesby, a director and head of fixed income at Harbour Asset Management.
As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz. And if you're interested in contributing the occasional Top 10 yourself, contact gareth.vaughan@interest.co.nz.
See all previous Top 10s here.
1. No hike just yet
The RBNZ left the Official Cash Rate unchanged at their 30 January review. While there was plenty of evidence that it is time to start withdrawing stimulus, they judged that waiting six weeks will not hurt.
By signalling that rate hikes are on the way, they have successfully primed the market for a series of rate hikes over the next 12 months.
2. Uncertain political environment
The upcoming election is an important uncertainty facing investors in 2014. There is an old saying that the state of the economy determines election results.
This would suggest that National could ride a wave of support on the back of economic momentum.
However, if the economy is really strong, it could make voters more comfortable choosing Labour/Greens over a traditionally more fiscally prudent National. An update of the comprehensive polling by UMR Research is something to watch.
3. Price stability promotes a sustainable expansion
Graeme Wheeler gave a speech last week directed almost squarely at Labour and the Greens, explaining why interest rates will need to rise to ensure New Zealand’s economic expansion is sustainable.
It also includes a striking chart highlighting the importance of the Chinese economy, as an export destination for key exports.
4. Technology is driving reindustrialisation
Strategas’ US manufacturing conference highlights the reindustrialisation of the US is part being driven by new technology - robots, drones, smart phones tablets, imaging, GPS and apps.
Companies are seeing significant investor interest as revenue growth accelerates. The NZ tech sector has been very strong.
5. RBA between a rock and a hard place
The Reserve Bank of Australia (RBA) has been left between a rock and a hard place with the Australian economy cooling post mining boom, at the same time that inflation has surprised on the upside.
The graph below from their last forecast round is now looking very out of date, with CPI inflation squarely back in the middle of the 2-3% target range. This tipped the scales and forced the RBA to move from an easing bias to a neutral bias following their board meeting on Tuesday.
6. EME wobbles
The main story of the past week has been emerging market volatility, as investors have grown nervous about how they will cope with a withdrawal of monetary stimulus from the US Fed.
However, even Nouriel Roubini (Dr Doom) thinks that emerging markets are better positioned than previously to deal with their challenges.
Nonetheless, the threat of a full-fledged currency, sovereign-debt, and banking crisis remains low, even in the Fragile Five, for several reasons. All have flexible exchange rates, a large war chest of reserves to shield against a run on their currencies and banks, and fewer currency mismatches (for example, heavy foreign-currency borrowing to finance investment in local-currency assets). Many also have sounder banking systems, while their public and private debt ratios, though rising, are still low, with little risk of insolvency.
7. Emerging market spillover to developed markets
Gavyn Davis at the Financial Times does a great job analysing the potential spillover from emerging to developed markets. He concludes that the consequence for developed economies seem largely manageable, assuming that China does not have a hard landing.
As the graph above shows, the EM crises in the late 1990s did not, in the end, prove fatal for equities in the US and Europe, but they did cause occasional air pockets, notably in 1998. This is why investors are focused on whether the current EM crises will deteriorate further, and whether they will eventually take the DM’s down with them.
8. Shock departure at Pimco
With US$2 trillion in assets under management, Pimco is one global bond manager having to navigate emerging market volatility. Markets were left shocked at the surprise resignation of CEO Mohamed El-Erian.
On the surface, CIO and founder Bill Gross and Mohamed El-Erian seemed the perfect combination of market animal and economic policy thinker. El-Erian’s departure leaves Pimco with a succession challenge, but a choice of nearly 2,500 internal staff to choose from.
9. Bernanke hangs up the suit
Ben Bernanke also departs the US Federal Reserve this week, on his way to the Brookings Institute.
I was fortunate enough to meet Ben Bernanke, as a bag carrier in a UK delegation to the Fed at the start of his chairmanship in 2006. Our first impression was that as an academic he looked very awkward in a business suit. This video briefly documents his tenure that followed.
10. Currency union dominates Scottish independence debate
Finally, here is something from left field. When Scottish politicians first began their push for independence from the United Kingdom, they wouldn’t have predicted that the terms of a currency union would have become the centre of the debate.
However, as explained by the Bank of England governor in this speech, the European sovereign crisis is a reminder that if Scotland wants to retain the British pound it will have to forego some of its fiscal independence.
The euro area is now beginning to rectify its institutional shortcomings, but further, very significant steps must be taken to expand the sharing of risks and pooling of fiscal resources.
In short, a durable, successful currency union requires some ceding of national sovereignty. It is likely that similar institutional arrangements would be necessary to support a monetary union between an independent Scotland and the rest of the UK.
7 Comments
#2 I realise people get more passionate abouttheir politics than econmic fundamentals suggest the political parties are capable of influencing, but I'd like to point out that the "over a traditionally more fiscally prudent National" does not see a lot of empirical evidence for that tradition, in things like GDP growth, overseas debt etc. You can engage in some special pleading (National had the GFC, the 80s Muldoon in National and Roger Douglas and Richard Prebble in Labour shouldn't count against the positions we imagine the parties to have had if we ignore history) but even if we exclude governments to the few short years we claim are representative of a "true" National vs. non-National government it is all pretty much of a wash in terms of big differences. Though a lot of business people feel happier when "their guys" are in charge, regardless of actual outcome.
If you look at the way the markets actually behave (in terms of actual investments rather than political comments from people involved) the cold hard cash speaking suggests that International markets are happy to invest in countries with a rule of law and free elections regardless of who wins, which is why having the Greens in govenrment in Germany for so many years now has not hurt their economy in the slightest.
So boiling it down, through this year we are going to see some/ a lot of passionate comments of people this year, but a certain disconnect with facts.
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