Market overview

Global markets hesitated in August, with most down between 1.9% and 4.9% and the ASX200 down 2.4%. The NZ property index was up 3.2% in August. The NZX50 was down 0.9% – without A2 it would have been up 1.6%. Global bond yields moved materially lower – the NZ10 year yield dropped from 1.48% to 1.05%, the Australian 10 year from 1.21% to 0.9%, and the US 10 year from 2.06% to 1.50%.

The move lower in global bond yields was extreme and we expect some retracement of the move in the short term. Market focus was on the US yield curve inverting, with commentary that curve inversions precede recessions. This is true, but a recession does not follow every inversion. Historically, three major imbalances signal a recession – rapid private sector debt growth, excessive cyclical spending, and accelerating inflation. None of these factors is present currently and so the probability of an imminent recession is low.

The August reporting season was generally in line with expectations. However, outlook statements reflected some margin compression and corporate caution. Defensive and yield stocks outperformed, while growth stocks underperformed. There were more downward revisions of forecast earnings for the next couple of years than upward revisions.

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