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Making Sense of a changing economy

Milford Asset Management Portfolio Manager and Deputy CIO David Lewis says falling business confidence and a slowing economy are now adversely influencing business investment decisions.

“The economy is not tanking, though there’s been a gradual slowing over the past three years. But you have to remember, our population’s been growing pretty quickly, at 1.5% – so, a lot of the GDP growth we’ve been getting here is due to the fact that there are more people. On a per capita basis, it’s up over the last year by just half a percent, so that is quite soft.

And falling business confidence is now being reflected in how businesses are actually investing in their own enterprises. You look at business investment, which is a component of our GDP calculations, that’s risen by 0.3% in the year to June – a year ago it was over 6%. That to me is evidence that businesses, while not pulling back significantly, no longer have the confidence to be investing more.”

Although we face the challenge of getting infrastructure built because of capacity constraints in the sector, David Lewis says the case for boosting infrastructure spending is ‘very strong’.

“One of the key reasons is that when you are looking at any long-dated investment like infrastructure, whether you’re a government or a business or even a household thinking about a mortgage for example, one of the key elements to that decision is how much is it going to cost me to make that investment. For a government it effectively comes down to the interest rate – what’s it going to cost you to borrow the money to put into a new piece of infrastructure like a road or a hospital. The 10-year government bond yield in New Zealand is down to 1.2%, so it’s a very cheap time to invest in long-term infrastructure that will help our long-run growth rate.”

While the sharemarket is heading in the opposite direction to business confidence, that is prompting Milford Asset Management towards a more cautious stance as it positions its investments.

“The strong performance of the NZX is leading some share valuations in New Zealand to become a bit more stretched, so we are taking a more cautious approach across our portfolios in New Zealand. We’re not in full defence mode, we’re just more cautious than we have been over the last couple of years.”

You can also view David’s interview discussing these and related issues if you click here.

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