The economic data out of the US has been on the weaker side of expectations, leading to both a negative impact on the equity market, and a subsequent rally in the bond market. With the slower pace of the recovery, the consensus for an interest rate hike has been shifted back to November, with the growth forecast for 2002 also undergoing a downward revision.
The Federal Reserve (Fed) has been waiting for strong indications that the upturn is under way before they start raising interest rates, and an August move has been ruled almost entirely out. Although a double-dip recession appears unlikely, May retail sales were weaker-than-expected, declining –0.9% (MoM), which is three times the decline expected. In addition to this, the Michigan Consumer Confidence (June) also experienced a sharper-than-expected decline.
While the US remains a target for further terrorist attacks, and is still suffering from accounting concerns with the recent conviction of Andersons, not all the news is bad. The apparent recovery in the long-suffering industrial production sector has continued to gain momentum despite the softer sentiment.
New Zealand Data
Closer to home, the NZ Manufacturing Survey for the March quarter has indicated that the first quarter GDP increased in excess of 1% for the quarter on quarter. The New Zealand Stock Exchange (NZSE) had the strongest performance over the month with only Japan and Australia also experiencing a positive return. The return by the NZSE, at 3.48%, is in excess of double the Nikkei, the second best performing stock exchange. Germany was the worst performing exchange though still substantially out performed the MSCI World Gross that returned –4.98%.
Managed funds
The US equity market weakened over April and this trend continued into May. The performances of the International Equity (Global) Unit Trusts & Group Investment Funds (GIFs) were largely negative over May with the TOWER GAM Global Gateway one of two funds to have a positive return. On average the sector returned –3.87% and the table below illustrates 14 of the 31 funds based on their history and representation of the broader equity market.
The out performance of the TOWER GAM Global Gateway can be explained by it’s small exposure to the US market. Most of the funds in the sector have about 50-55% in US equities while the TOWER GAM Global Gateway has less than half of this, with a 23.7% exposure.
A possible absence of political uncertainty?
The Prime Minister has called an early election, four months before the end of the government’s term. Labour has been strong in the polls of late and it is thought that Helen Clark wants to capitalise on this popularity and possibly win the majority without forming a coalition. Any coalition is likely to be with the Greens but this would prove difficult given the Greens inability to work through issues of difference. Typically an election year proves difficult for equities as international investors withdraw due to the uncertainty surrounding the government. This doesn’t appear to be the case this year with the impact of election year seemingly having little impact on the equity market.
Looking forward…
The negative sentiment in the US appears to be driven by poor corporate governance and the performance based incentives of CEO’s. The misrepresentations of accounting records to both meet profit expectations and boost remuneration has impacted negatively on the US equity market, which has been further troubled by the general dishonesty of CEO’s. The latest are the charges of tax avoidance against the CEO of Tyco International for an amount that is likely to be a small fraction of his income.
These issues need to be addressed going forward for the upturn to gain momentum. While the prospect of a double dip recession continues to look unlikely, rather the pace of the recovery is now the question.
