Asset allocations

- Editor

International Equities – Neutral

The many measures undertaken by policy makers have gone some way towards laying the foundation for an improved stability in financial markets, and there have been some early signs that the pace of the decline in economic growth is slowing. However, we expect the second round effects of the credit crunch will be with us for some time. The de-leveraging of financial institutions and households will be a slow process. Falling profits, capital raisings and corporate defaults will continue to weigh on equity markets to perform strongly.

Domestic Equities – Neutral

The New Zealand equity market’s characteristics such as high dividend yields and limited exposure to financial stocks have made it more defensive than global equities. However, NZ shares will struggle to make significant ground against the headwinds of difficult economic conditions. Even though monetary conditions are significantly more accommodative, corporate NZ will be capital constrained for a time yet.

Global Property - Underweight

Listed entities are still trading at a significant discount to Net Asset Values, even though NAV’s have declined substantially over the past year. Dividend yields are now very attractive relative to interest rates. However, the sector is suffering from deteriorating fundamentals and difficult credit conditions.

Domestic Listed Property - Overweight

The sector is trading at a significant discount to NTA, more than compensating for the likely decline in asset values as cap rates rise. In addition, long lease terms, high occupancy rates and under-renting will help offset the impact of a weak economy. Dividend yields are extremely attractive especially as cash rates are set to fall. We expect the NZ LPT market to behave more defensively amid the uncertain global environment, although higher gearing levels in Australia remain a risk for the sector.

International Fixed Interest – Neutral

Global government bonds will continue to be the safe haven destination in times of crisis, declining inflation and monetary easing. Over the medium-term, the outlook for government bonds is less attractive as government deficits rise. Global credit offers attractive yields despite recent spread narrowing, and is pricing in well above average default activity. However, defaults will rise sharply, particularly in the high yield space.

Domestic Fixed  Interest – Neutral

NZ government bonds have similar attributes to global bonds in this economic climate, but overall our expected returns are slightly higher.

Cash  - Underweight

Expected returns from NZ cash are unattractive over the next 12 months with short term interest rates expected to remain low for some time. This increases the relative attractiveness of other income-generating asset classes.

NZ Dollar - Underweight

Short-term movements will continue to be driven by fluctuations in the US dollar. However, over the medium term, a challenging global growth environment, narrow interest rate differentials and a large current account deficit, particularly in an environment where funding will be hard to come by, are negatives for the NZ dollar. This justifies hedging levels below benchmark with a medium-term view.