By BRIAN FALLOW
In recent years New Zealanders have increasingly been sending their investment dollars overseas.
But they may be in for some negative surprises, investment bank ABN Amro warns.
International financial markets are too optimistic about the outlook for inflation and interest rates, says ABN Amro's chief economist in New Zealand, Rodney Dickens.
"If inflation rises as we expect, returns from international investments and in particular from international shares are likely to disappoint," Mr Dickens said.
His analysis starts from the fact that unemployment in the largest economies, the G7, has fallen below its long-term average of just under 6 per cent for the first time in a decade.
For the past 25 years inflation has been closely inversely correlated with unemployment, the one rising when the other falls, with a lag of eight months or so.
In the stellar performance of international sharemarkets over the 1990s a key factor was the halving of interest rates in the course of the decade, which in turn reflected unusually high unemployment. For the past three years returns to New Zealand investors on their overseas investments have been boosted by a declining exchange rate.
But the fall in G7 unemployment over the past year suggested higher inflation next year, Mr Dickens said.
Growth and employment were still benefiting from the momentum imparted by the easing of monetary policy by central banks in the aftermath of the Asian and Russian crises.
But the markets were underestimating the inflation risks, he said.
"At the moment the collective wisdom of international bond markets is that G7 inflation will be as low as 1 per cent going forward. With actual inflation at 2 per cent and, in our view likely to rise to 3 per cent over the next year, the international bond market may have to undertake an major reassessment of inflation over the next year."
Inflation a threat to overseas returns
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