Market View From the Top from Spicers CEO Gordon Noble-Campbell

Global recovery is at challenging stage

13 December 2010

The developed-world economic recovery has entered its most challenging stage. The momentum provided to growth from fiscal stimulus such as lower interest rates has worked but must now move to a recovery driven by consumer demand. The performance of global financial markets has been flat over the last six months however we have seen an improvement over the past three months.

Emerging markets including China, India, Brazil and Russia continue to be the driving force of the global recovery. Over the last decade earnings from emerging markets have grown about 15% per annum, compared to about 5% for developed markets. We don’t expect the 10% differential to be maintained over the next decade but we do think earnings growth in emerging markets can out-pace developed markets by 5%.

Economic growth in the United States is slowing. After relatively strong growth in the December quarter of 2009 and the March quarter of 2010, growth slowed to just 0.4% in the June 2010 quarter. Importantly, the key areas needed to perform to enable a sustainable recovery in the United States, business investment and exports, are growing well. Housing is still a drag on the economy with 23% of US households in negative equity. The US economy lost 8.5 million jobs during the recession and it will take a long time to get those jobs back.

Latest signs from Europe are encouraging. Exports are recovering, industrial production is rising and employment, while not yet growing strongly, has stabilised. Europe enjoyed robust growth in the June quarter of 2010 with GDP rising 1% in the three month period, which is a good result. Germany is proving to be the growth engine of Europe, mostly on the back of exports. GDP growth of 2.2% was recorded in the June quarter, a post-reunification record. However, we remain cautious about the growing divergence in the economic state of individual economies within Europe such as Greece.

New Zealand’s economic recovery continues to be modest. Annual growth in the year to March stood at 1.9%. The traditional drivers of growth remain subdued and are expected to remain so as households focus on debt repayment and remain cautious about their largest asset, their houses. We expect New Zealand GDP growth of 2.5% this calendar year and 3.0% next year. Interest rates are expected to rise gradually over the next two years, but less sharply than previously expected, to support the economic recovery.

Across the Tasman, the Australian economy is going from strength to strength. The 1.2% increase in GDP over the June quarter was better than market expectations and took the annual rate of growth to 3.3%. We retain the view that Australia will continue to outperform New Zealand over the next couple of years, boosted by strong exports to China.

The journey ahead will continue to be bumpy but it’s heading in the right direction. Keeping to your long term financial plan, not reacting to short-term volatility and ensuring your investments are widely diversified will help ensure you successfully protect and grow your capital.