Market Views From Paul Sewell

Markets have performed well year to date, especially in Europe and Japan.  The New Zealand economy is still in robust health and recent official data is also showing ongoing growth.  We have been more positive than most on the global economic outlook.  We believe we have seen the low in European bond yields and that we have commenced on the path of reflation. There will be fits and starts along the way, as there always is and many brilliant minds will forecast the end is near.  We are seeing signs of traction between monetary policy and the real economy in both Europe and America.  The decline in oil prices allows the three most populous counties –China, India and Indonesia to cut interest rates.  China has now cut interest rates three times in the last 6 months.  They have much ammunition left in their monetary pot as they re-balance their 10 trillion economy.

However we do expect lower economic growth over the next few decades from the western world.  So how will this impact on earnings per share growth? As we have seen from the GFC lower GDP growth will have little impact on EPS growth.  We have seen companies adapt to this environment and adjust their capital spending accordingly.  Lower capital spending amounts to less need for share issuance and more buybacks.  Earning will grow more slowly, but earnings per share should grow much as before, and it’s the EPS that we care about.

We are expecting lower interest rates, low GDP growth, higher PEs and valuation multiples and we all need to get used to it.   It will require that we review client spending plans as lower returns from well diversified portfolio’s means less money to spend.  It’s a great time to be reviewing our investors overall financial position.