The Fed plays it safe with a 25-basis-point rate hike. Photo / Getty Images
The US Federal Reserve has opted to look past the turmoil in world banking and lift its official rate, so what will that mean for local markets?
The Fed’s move put an end to hopes that central banks might take an easier, softer stance, given the delicate state of the world’s banking system following the collapse of Silicon Valley Bank.
But in the end, the Fed stuck with the script and went through with a 25 basis point hike in its Fed funds rate, to a range of 4.75-5.0 per cent.
Fed chair Jerome Powell stressed that it is too early to know what impact the banking problems will have on the economy.
John Carren, director, wealth research at Jarden, said New Zealand banks were in a sound position but were not completely immune from the impact of overseas banking issues.
“Global credit dislocations can impact the cost of funding for New Zealand banks, although to a much lesser degree than during the Global Financial Crisis,” he said.
“Nevertheless, there may be more pressure on local banks to raise retail deposit interest rates to ensure these remain a safe and reliable source of bank funding in a more uncertain global financial environment.”
That may take some of the pressure off the Reserve Bank to raise the official cash rate (OCR) to take the heat out of domestic inflation.
In addition, lower expectations of future Fed interest rate hikes may put downward pressure on the US dollar and keep the value of the New Zealand dollar higher than otherwise.
“This could dampen local inflation sourced from overseas and could be another factor tempering the need for further RBNZ OCR rises,” Carran said.
The Reserve Bank’s official cash rate sits at 4.75 per cent and bank deposit rates, finally, are giving equities a run for their money.
David McLeish, senior portfolio manager at Fisher Funds, said the Fed had to tread a fine line between monetary stability and financial stability.
On that score, a 25 basis point hike was probably a safe bet, he said.
Any thoughts of a pause in monetary conditions as a result of ongoing banking flare-ups had been dispelled by the Fed. US inflation, which hit 9.1 per cent last year, is at least heading down.
“In the New Zealand market, we are still detecting a lot of idiosyncratic, domestic inflation pressures,” McLeish said.
In that context, the Reserve Bank was likely to continue to hike interest rates.
“So the decision from the Federal Reserve has probably given them [the RBNZ] more conviction around that, not less,” he said.
“That’s a headwind for the economy, therefore a headwind for company earnings, and is therefore a headwind for the sharemarket.”
Salt Funds managing director Matt Goodson said bank failures were occurring because historically easy monetary policy had seen huge excess deposits (in excess of loans), a portion of which were uninsured.
These had then been invested in assets which have fallen in value, so depositors have grown nervous about whether they can be repaid.
On the inflation side, there were some welcome signs but he sees rates staying higher for longer than markets have been projecting - a plateau rather than a brief peak.
“The forces in New Zealand are similar but, thankfully, without the bank failures.”
High rates would put pressure on the most leveraged parts of the market.
“Property syndicates are one obvious initial area of pain and tight monetary conditions may continue to keep a lid on wider equity and property markets for some time,” Goodson said.
“That said, several years of weak performance now mean that valuations are more reasonable than they have been for some time.”
Foreign ownership of the New Zealand sharemarket has lifted but is below its record high, set in March 2020, Forsyth Barr says.
The broker’s latest estimate for international ownership of the New Zealand equity market (by total market capitalisation) is 38.6 per cent (December 2022), with a reasonably strong bounce of +180 basis points on the September 2022 quarter reading and +200bp on the prior corresponding period, December 2021.
The increase in ownership has been in both Australian (up 87bp) and other international investors (up 92bp).
“Our ownership estimate is now 344bp below the all-time high, set in March 2020, where it stood at 42.1 per cent,” Forsyth Barr said.
Analysis of NZX notices indicated positive inflows to New Zealand from international investors for the March 2023 quarter (up to March 17).
This included buying in Fletcher Building and Kathmandu by the Allan Gray Group, and the Mitsubishi UFJ Financial Group increasing its holding in Tourism Holdings.
Fund flows in the iShares MSCI New Zealand exchange-traded fund, which Forsyth Barr uses to gauge international investor sentiment in regard to New Zealand, had recently bounced back with flows in January and February 2023 the strongest since mid-2020.
Australian ownership of the New Zealand equity market at February 28 sat at 11.2 per cent and continues to show a steady recovery since the dip in April 2022 (9.7 per cent). This was the third quarter of growth.
Specific companies that have had substantial moves in Aussie ownership over the past three months include Fisher & Paykel Healthcare, Vista Group and Sky TV, with increases of 79bp, 114bp and 49bp respectively.
On the flipside, selling was seen in Pushpay, Ebos and The a2 Milk Company, down 155bp, 116bp and 60bp.
Synlait Milk’s director of operations, Nigel Macdonald, has resigned, effective from the end of May.
The company said Macdonald’s focus over the coming months will be on Synlait’s 10-year asset plan.
“Nigel has built and led Synlait’s operations team through Covid-19, which was a challenging period for the company and its people,” the company said.
Head of manufacturing Glenn Laing has been appointed acting director of operations.
The company’s share price has come under pressure since it moderated its earnings outlook for the full year.
Chief executive Grant Watson told the Herald in early February that Covid-19 had cast a long shadow over Synlait Milk but that a recovery was under way.
Watson had high hopes for an as-yet-unnamed multinational which he says may one day supplant a2 Milk as Synlait’s biggest customer.
But just over a month later, shares in Synlait slumped after the dairy company issued earnings guidance that was well below market consensus.
Synlait said it expects to report a 2023 net profit in the range of $15m to $25m, well short of market expectations of around $50m.
The company is due to report its half-year result on Monday.
Watson said in the latest release that it had become “increasingly clear” that Synlait’s two-year recovery plan would now take three years.
Liam Dann talks to Hannah McQueen, founder of financial strategy firm EnableMe.