The local economy has lost its alleged ‘rockstar’ glitz some time ago but a limited comeback tour (small venues only) could be on the cards this year, according to Nikko NZ fixed income portfolio manager, Matthew Johnson.
Johnson told delegates at the annual Nikko NZ roadshow in Wellington last week that with inflation “defeated”, mortgage rate relief flowing, in-bound tourism picking-up and migration possibly bottoming-out, the country might be emerging from the doldrums.
Indeed, government figures released just a couple of days after the Nikko symposium found the local economy grew 0.7 per cent during the three months to December 31 following two successive quarters of negative GDP – the quasi-official definition of recession.
But the return to growth, however insipid, along with other economic factors would probably put a cap on the scale and duration of interest rate cuts that have eased 2 per cent from a cyclical high of 5.5 per cent in May 2024.
According to Johnson, current mortgage rates for indebted NZ homeowners are likely at, or near, the trough in what could be a short stay at the bottom.
In a note to investors this February, Nikko NZ head of bonds and currency, Fergus McDonald, suggested the local central bank projection of the official cash rate (OCR) languishing at 3 per cent until 2028 was a tad over-optimistic (or too bleak, depending on the perspective).
“… we do not expect interest rates to remain at the bottom of the cutting cycle for such a long period,” McDonald says in the note. “In our view, once the OCR has fallen to that level, past precedent suggests that a new tightening cycle or a change in the direction of interest rates is likely to follow approximately nine to 12 months afterwards. As a result, a key question for us is the length of time the OCR is likely to stay at the end point of the current easing cycle.”
Johnson told the Nikko audience that the market had priced-in higher rates over time than the RBNZ forecast with some important implications for the not-too-hot-not-too-cold serving of monetary policy known as r∗ (r-star) in academia.
While r-star is only observed in retrospect, the RBNZ forward estimates put it in the order of 2.5 per cent to 3.5 per cent but the neutral range might be at least as high as 3.5 per cent to 4 per cent, Johnson said.
And with other forces pushing the long end of the NZ yield curve higher, he said local fixed income investors might ultimately see the “return of roll” – or banking capital gains from selling bonds close to maturity.
“You need a steep upward-sloping yield curve [to profit from roll],” in a strategy that can add 0.5 per cent to 1 per cent to bond fund returns each year, Johnson said to polite applause.
Nikko will take to the stage in September under a new identity as Amova Asset Management in a global rebrand revealed last year.