While mixed, global economic data this year continues to point to a generally steady recovery. We have seen both the World Bank and the International Monetary Fund (IMF) increase their estimates for global growth in 2014, UK unemployment has fallen faster than expected and government debt levels in Europe registered a decline for the first time since 2007.
Locally, New Zealand economic readings continue to exceed expectations. Our terms of trade remain high, the Canterbury rebuild is gaining momentum, unemployment is falling and consumer sentiment appears robust following the holiday trading period. The highly regarded Quarterly Survey of Business Opinion (QSBO) from the NZIER was released last month and it made for very favourable reading. The survey showed that in December businesses were the most optimistic they have been since June 1994, domestic trading activity is at its highest levels since March 2005 and reported hiring is at its highest level since December 2006.
We expect an increase in the Official Cash Rate (OCR) at the next Reserve Bank of New Zealand (RBNZ) meeting, to be held in mid-March. Expectations are for the OCR to rise 0.25% at that meeting, followed by further gradual rises through the year and the OCR to end 2014 at approximately 3.50%.
In terms of currencies, we expect the NZ dollar to remain at above-average levels over the course of the year. However, we believe most of the strength in the currency is behind us, and that over the coming two years we may begin to see some element of weakness creep in.
Asset allocation – we remain upbeat on equities, and see continuing opportunities to add to global holdings. The local economy is gaining momentum and 2014 is expected to be a strong year in terms of growth. Our corporate sector is in good shape with low debt levels, forecast earnings growth of close to 8% for the next 12 months and an average gross dividend yield of almost 6%. These factors should all keep our market well-supported. However, following such strong returns over the past two years, we expect a more modest performance during 2014. Rising interest rates will be a key theme over the next few months, and while this reflects a strengthening economy, it will slow house price gains and increase borrowing costs. It could also mean that growth stocks do better than income stocks. We remain underweight fixed interest. We expect rising interest rates and the potential for more issuance to provide opportunities later in the year.
Simon Coulter (CA) is a Senior Investment Adviser at Craigs Investment Partners. His disclosure statement is available free of charge under his profile on www.craigsip.com. This column is general in nature and should not be regarded as specific investment advice.