By Karol Sindera
We believe current interest rates in Australia and New Zealand present an attractive investment opportunity.
After pausing in April, the Reserve Bank of Australia decided to restart its hiking cycle and raise its cash rate by 25 basis points to 3.85% while keeping forward guidance hawkish. This came as a surprise to the markets, given that the country’s first-quarter consumer inflation report came in softer than expected and broadly in line with the central bank’s stated objective of a 2 – 3% target by mid-2025.
RBA Governor Philip Lowe acknowledged that “very tight” labor conditions, elevated services and energy inflation, and a recent rebound in the housing market were the main drivers behind the increase. High-frequency data also indicated an uptick in population growth triggered by net overseas migration, which could boost inflation even further. However, when looking at the latest economic forecasts for growth and inflation, we believe this could be the last hike in the current cycle.
From the fiscal standpoint, the tight labor market, coupled with higher commodity prices, has significantly improved Australia’s federal budget deficit. Even using conservative assumptions, the outcome has skewed toward better results. This should support Australian government bonds, swap spread instruments, and semi-government bonds, especially within the New South Wales and Victoria regions, which may undergo more strict discipline to revamp their budgets after local elections.
Meanwhile, in New Zealand, the central bank raised rates by a hawkish 50bps at its last meeting, bringing the official cash rate to 5.25%. Like Australia, the job market in New Zealand has been very resilient. The latest report shows a record level of employment and persistent annual wage growth. However, the latest CPI print confirmed that inflation has passed its peak. Although price increases remain above the Reserve Bank of New Zealand’s target range of 1 – 3%, early signs of a slowing pace support the RBNZ’s hiking another 25bps and then taking a pause.
Overall, Australia and New Zealand have significantly tightened financial conditions since the start of their hiking cycles. As higher rates continue their work through the economy via transition mechanisms, we believe government bonds from New Zealand along with semi-government bonds from Australia present an attractive investment opportunity due to their high-quality yield pick-up.
This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice. This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Investment decisions and the appropriateness of this material should be made based on an investor’s individual objectives and circumstances and in consultation with his or her advisors. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. The firm, its employees and advisory accounts may hold positions of any companies discussed. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.
Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.
This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions.
The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.
© 2009-2023 Neuberger Berman Group LLC. All rights reserved.
Original Post
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Read the full article here