In data going back to the mid-1960s, New Zealand shares have never declined three years in a row, making this a somewhat unwanted milestone, writes Mark Lister. Photo / NZME
In data going back to the mid-1960s, New Zealand shares have never declined three years in a row, making this a somewhat unwanted milestone, writes Mark Lister. Photo / NZME
Opinion by Mark Lister
Mark Lister is Head of Private Wealth Research at Craigs Investment Partners
After a solid first half of the year, it’s been a difficult few months for the local sharemarket.
This weakness has had the NZX 50 slip about 6 per cent into the red on a year-to-date basis, putting it on track for a third consecutive annual decline.
The market was down a marginal 0.4 per cent in 2021, before suffering its worst year since the GFC with a 12 per cent fall in 2022.
In data going back to the mid-1960s, New Zealand shares have never declined three years in a row, making this a somewhat unwanted milestone.
It’s been more of an (annoyingly) slow decline than a sharp fall.
The index is down 18 per cent since the end of 2020, on a par with the recent housing market slump, but not nearly as bad as some of the more-difficult periods over the decades.
There are several reasons for the weakness, with interest rates near the top of the list.
The six-month term deposit rate has increased from an all-time low of below 1 per cent in 2021, to about 6 per cent today.
Mark Lister is an investment director at Craigs Investment Partners.
That’s the highest in 15 years, and the most attractive some will have seen in their investing lifetimes.
To be fair, the local sharemarket is offering a gross dividend yield of about 4.5 per cent, the highest in almost five years.
Dividend yields are usually higher than term-deposit rates, but the latter leapfrogged the former 12 months ago for the first time since 2008.
Shares provide returns in other ways too, as earnings and dividends typically increase over time — unlike term deposits, which are stagnant — and share prices rise on the back of that.
However, with a myriad risks out there — and after the unwelcome ups and downs of the past five years — for many people 6 per cent is simply too good to pass up.
No risks, no fees and no worries.
The attractive rates might not last forever, though, with term deposits closely linked to the Official Cash Rate.
While the Reserve Bank looks firmly on hold, it has suggested the first OCR cut won’t come until late next year or early in 2025.
At least in part, this is designed to push the “higher for longer” message and ensure markets don’t get hopeful about cuts too soon.
However, things could change if we experienced a bout of economic weakness or a faster-than-expected slowdown in inflation.
Any central bank reserves the right to change its mind, so a scenario where interest rates fall earlier cannot be discounted.
At least two economists see the first OCR cut happening in the first half of 2024, and believe it could be in the low 4s by this time next year.
At present that’s a contrarian view. For it to prove correct we’d need to see inflation keep falling, the labour market ease further and the economy weaken.
All those things are possible, as is an accident somewhere in the world as somebody buckles under the pressure of high bond yields.
That wouldn’t be desirable, but it would be another catalyst for interest rates to come down faster than expected.
Using the somewhat crude price-to-earnings ratio as a guide to valuations, local shares are about 8 per cent cheaper than the 10-year average and more than 30 per cent down from the peak in 2020.
But relative to bond yields, the market is still a little pricey, and staying on the sidelines is the path of least resistance for many.
To shake off the malaise, we might need a shift in the interest rate outlook and for declines to be on the horizon.
Sooner or later that’ll happen, although it’s difficult to predict when, and the path with which we’ll get there.
Mark Lister is investment director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision, Craigs Investment Partners recommends you contact an investment adviser.
