Highlights from Fieldays®

Highlights from Fieldays

It was great to meet so many of you at National Fieldays at Mystery Creek. We had hundreds of people through our marquee over the four days, and hundreds more checking out the bikes from the Andes trip out the front. The most popular seminar was Economic and Investment Outlook, which is really just a free for all Q and A session. Here are the questions we were asked over and over again.

Where do you think economic growth is going in the next couple of years?
Gareth: I reckon the base scenario (about a 45% chance) is that the world economy will pick up over 2010 & 2011, and that we’ll see growth of about 3% pa. That growth is likely to be reflected in NZ’s export sector initially, then spread across the economy as a whole.

But there’s a major risk to that sanguine outlook: the showdown over the Euro. The $750bn emergency package isn’t chicken shit, but when push comes to shove, the terms of accessing the emergency pool are likely to be too tough for the profligates to swallow and that raises the risk they might opt to default instead.

If that happens, EU banks could find that bond holdings they thought were an asset are now in serious doubt, and they’ll look to their underwriter – the ECB – to stump up. Meanwhile other beleaguered South European governments could see default as a hell of a lot easier. Any political roadblocks might stall the process sufficiently to unleash contagion. Merkel’s already saying stop stimulating, even though she approved the rushed through $750bn rescue.

Underneath all of this is a deep suspicion that the Euro is not a sustainable concept.

Now the government debts of Europe are not the only risk.

A second risk is the Chinese authorities’ tightening. If they hit that too much it would take wind from the sails of global recovery. It’s unlikely and such fears are based more on West’s continued amazement at the China phenomenon so I don’t give it too much weight.

Finally a positive risk. The US continues to recover—with rests—but probably quicker than we all expected just a year ago. I don’t think there’s a chance that the US will prematurely tighten – unlike in Europe. So if anything the US has been a positive factor. BUT its growth has been in large part inventory rebuilding, so if the shoppers just happen to fade, then the US producers will stop making stuff pretty quickly. We don’t expect that, but the consumer upswing is hardly what you’d call robust.

How do you see the NZ recovery unfolding?
Gareth: Under our 45% probability baseline, the V-shaped global recovery, export-related industries get the income, they restructure balance sheets to face the New World of tighter credit and then they start investing for growth. This just cascades across the whole economy – employment growth follows & then consumer spending. Note housing is not leading this charge!

What does this mean for investment markets?
Gareth: My thinking is that there is:
a)    a 25% chance of a second dip in world recession – most likely source, the Euro contagion.
b)    a 30% chance of a muddle through dull period of growth for the next couple of  years – yin and yang between points a & c
c)    a 45% chance that in a year’s time this current fear will all be forgotten and we’re back to business as usual.

So how to you translate that into an investment strategy?
Gareth: Our current portfolio positioning for a 100% growth mandate is 80% invested, with the 20% in cash entirely in commodity currencies (New Zealand, Australia and Canada).  We have moved closer to Baseline scenario allocation, where commodity (higher risk, carry trade) currencies benefit relatively.  But I have to emphasise that 45% for the V is hardly certainty. Such is the nature of this business.