New Zealand’s benchmark equity index has been down 17.5% so far this year, and the second half is expected to remain “challenging” as the impact of high inflation and rising interest rates on the economy figures.
Stock markets around the world have failed over the past six months as central banks aggressively raised interest rates to curb inflation that delivered more persistently than expected following economic stimulus during the pandemic.
In the United States, the benchmark S&P 500 index is down 20.6%, its weakest first half year since 1970, while Australia’s S & P / ASX 200 index is down 13.8% and the UK’s FTSE 100 index down 2.9%.
“All the major stock markets have had a very difficult first half of the year,” said Mark Lister, head of private wealth research at Craigs Investment Partners. Other assets such as housing, bonds and cryptocurrencies are also declining while commodities such as gold and oil have dampened the trend.
READ MORE:
* Stock market recovers, starting February on a positive note after a ‘rough’ January
* Stock market falls by 1.1% as higher inflation pushes up interest rates
* Stock market declines as investors worry about prospects for higher interest rates
Lister noted that the declines have followed sharp rises in asset values over the past two years due to ultra-low interest rates and money-printing programs.
“Every asset class in the world has risen dramatically, and now we are just giving something back as interest rates rise again,” he said.
Lister expects the second half of the year to remain “challenging”.
“I would be reluctant to say that all the volatility is behind us, but I think probably the worst of the volatility is behind us,” he said.
FINANCE AND EXPEDITURE COMMITTEE
Adrian Orr, governor of the Reserve Bank, discusses the risk of a recession in May.
The Reserve Bank started raising interest rates from a record low of 0.25% in October last year. In May this year, he raised the official cash rate to 2% and predicts that it will double to 4% by the middle of next year, as it seeks to regain control of inflation which is at a 30-year high of 6.9% .
Lister said the full impact of interest rate hikes has yet to flow through the economy as borrowers have re-established mortgage rates as loans are payable and have adjusted their spending to reflect higher costs.
“It will filter through the rest of the economy in the form of lower activity, lower spending and possibly higher unemployment,” he said.
Lister said there was a “strong possibility” that New Zealand would have a recession if current conditions continue.
“It will be hard to avoid,” he said.
cameron burnell / Stuff
Mark Lister, head of private wealth research at Craigs Investment Partners, says it will be difficult to avoid a recession, which will hurt the stock market.
Central banks have tried to slow down economies enough to turn inflation on its head, but not so much as to plunge them into a recession, he said.
“It’s just a very difficult balancing act,” he said. “It’s very easy to overplay your hand because it’s a blunt instrument and inaccurate.”
A recession is generally defined as a decline in two consecutive quarters of gross domestic product.
The US may already be in a recession, according to the Federal Reserve Bank of Atlanta’s GDPNow model, which showed a contraction of 2.1% in the second quarter after negative growth of 1.6% in the first quarter.
New Zealand’s economy hit 0.2% in the first quarter, with data for the second quarter appearing in September.
A recession will reduce business profits and lead to lower share prices, although Lister noted that the stock market has already taken the risk into account.
Lister said he felt “fairly comfortable” with the outlook for the New Zealand market, as it included very stable, predictable businesses such as electricity companies, telecommunications companies such as Spark and Chorus and Port of Tauranga.
“I actually do not feel too discouraged in the local market,” he said.
“No business is completely immune to a downturn, but those types of businesses tend to hold their own much more than high-growth technology companies. We have more of a safe, boring, predictable stock market than many other parts of the world, so our market tends to actually do well during weaker times. ”
For long-term investors who were building up their wealth, a downturn was a buying opportunity as prices were lower, he noted.
However, most people were scared and made poor decisions such as selling out at the bottom of the market, or giving up and putting their money in the bank where it felt safer, he said.
“You have to keep your nerve during the difficult times, and a lot of people are not very good at it,” Lister said.
“Someone who is a long-term investor and does not need to call this money for a reasonable period of time, I would say, you have to ignore this kind of thing and stay the course – and if there is something, you have to get ready to more for sale because you will do well.
“They will look back and it will be one of those periods that helped them build their wealth.”