Business & investing: Investors dump retirement stocks in the face of rising interest rates that will negatively affect property values
After initially slipping in reaction to last week’s 75 basis point hike by the Reserve Bank – its single biggest rate increase ever – the New Zealand sharemarket rebounded to end the week barely changed at 11,382.
However, stocks directly correlated to the fortunes of the property market were sold off sharply in the wake of the bank’s decision.
Ryman Healthcare shares plunged more than 20 percent at one point last week, falling below their March 2020 low at the peak of the Covid-19 selloff, as investors dumped the stock in the face of rising interest rates which will negatively affect property values as well as increasing the company’s already significant debt servicing costs.
Fellow retirement village operator Sommerset also saw more than 10 percent wiped from its valuation last week as a result of the selloff in the sector as the stock hit a two-year low.
The forecast ‘peak’ in the Reserve Bank’s cash rate has now been pushed even higher, from 4.1 percent to 5.5 percent. Just a few months ago it was expected to peak at 3.5 percent.
“That’s a central bank hell-bent on forcing inflation back within its mandated 1-to-3 percent year-on-year target band,” Kiwibank economist Jarrod Kerr commented in a note to customers following the decision.
“The Reserve Bank is effectively signalling another 125 basis points in interest rate increases over 2023 are still to come, taking the cash rate to 5.5 percent. Mortgage rates will be forced higher in response.”
Previously fixed 1 and 2 year rates, locked in between 2 and 3 percent two years ago are now rolling off onto much higher rates of between 6 and 7 percent placing a severe strain on already indebted households.
As a result, the central bank is forecasting a year-long recession as fast-rising interest rates take a bite out of demand.
The Reserve Bank is expecting up to four quarters of negative growth starting in June 2023, when the economy contracts by 0.5 percent.
“The peak to trough decline in the level of GDP [gross domestic product] is expected to be about 1 percent,” it said, noting uncertainty around the timing.
The forecasts then show two quarters of flat growth in June 2024 and September 2024 and only start to see signs of economic growth in December 2024 of 0.2 percent.
US rate increases expected to slow from here
In the US, the benchmark S&P500 index ended the week up more than 1.5 percent after minutes from the Federal Reserve’s November meeting, at which the central bank raised its main policy rate by 0.75 percentage points for the fourth time in a row, suggested a majority of officials were increasingly prepared to slow the pace of rate rises soon, when they are confident inflation has been tamed.
“We are probably seeing the end of the central bank storm and that is enough of a relief for most markets to see positive performances” one trader told the Financial Times. “The Fed is no longer behind the curve anymore, or so it seems.”
Further underpinning the continued underlying strength of the US economy, consumers spent a record US$9.12 billion online shopping during Black Friday this year, according to Adobe, which tracks sales on retailers’ websites.
Overall online sales for the day after Thanksgiving lifted 2.3 percent year over year with electronics being a major contributor, as online sales surged 221 percent over an average day in October, Adobe said.
Many consumers embraced flexible payment plans as they continue to grapple with high prices and inflation.
Some of this year’s hottest items included gaming consoles, drones, Apple MacBooks, Dyson products and toys like Fortnite, Roblox, Bluey, Funko Pop! and Disney Encanto, according to the report.
Meanwhile, the yield on 10-year US Treasuries surged as high as 4.34 per cent in late October, its highest level since 2007, but has since fallen as investors have begun to bet that inflation in the world’s biggest economy may have peaked. Inflation eats into the value of bonds’ fixed payments, rendering them less attractive to investors.
Protesters clash with security in China
Asian equities declined as pessimism over rising Covid-19 cases in China dampened investor sentiment, which in turn had a knock-on effect on oil prices.
The economic outlook in China, the world’s largest crude importer, is rapidly darkening. The country is reporting a near-record number of Covid-19 cases, spurring major cities from Beijing to Shanghai to revert to broad restrictions and mass testing. Amid its extended “Covid-zero” policy, the Chinese government signalled more monetary stimulus is possible.
But dissent is becoming more readily apparent as workers at Apple’s main iPhone-making plant in China clashed with security personnel. And on Sunday, protests against China’s heavy-handed Covid-19 curbs spread to more cities, including the country’s major financial hub Shanghai, nearly three years into the pandemic, with a fresh wave of anger sparked by a deadly fire in the country’s far west.
The fire on Thursday that killed 10 people in a high-rise building in Urumqi, capital of the Xinjiang region, has sparked widespread public anger. Many internet users surmised that residents could not escape in time because the building was partially locked down, which city officials denied.
The fire has fuelled a wave of civil disobedience, unprecedented in mainland China since Xi Jinping assumed power a decade ago.
Coming up this week
Monday
- Bremworth AGM
- Kiwi Property – Half Year Result
- Task Group Holdings – Half Year Result
- Third Age Health Services – Half Year Result
- Employment Indicators (Oct) – Stats NZ
Tuesday
- Arvida Group – Half Year Result
- Gentrack – Half Year Result
- Metro Performance Glass – Half Year Result
- F&P Healthcare – Half Year Result
- Asset Plus – Half Year Result
Wednesday
- NZ Automotive Investments – Half Year Result
- Building Consents (Oct) – Stats NZ
Thursday
- Vital Healthcare Property Trust AGM
Friday
- Synlait Milk AGM
- International Trade (Sept Qtr)
