Global markets were mostly higher overnight, with shares on Wall Street rallying strongly, led by Apple which jumped as its quarterly result was not as bad as feared by the market. Also this morning, the US Federal Reserve kept interest rates unchanged and was cautious about the pace and timing of any future hikes.
We have highlighted risks to the property market in the past, and were quoted in the NZ Herald again yesterday: Click HERE to read the NZ Herald article.
Houses are usually a highly leveraged investment, with 80 to 90 percent of property values usually funded by mortgage debt, and we see a major risk to the property market as a credit crunch, an economic condition in which investment capital is hard to secure.
The big 4 banks are tightening their lending practices following the Royal Commission in Australia and offshore funding costs are rising. At the same time, the Reserve Bank's proposal to require NZ banks to run much more conservative balance sheets has been estimated by analysts as potentially adding around 1 percent to mortgage rates. These factors combined could make it much more difficult to borrow and service a mortgage, significantly hitting property demand as buyers will potentially be unable to obtain lending.
Stock in Focus: Air New Zealand (AIR:NZX /AIZ:ASX)
Air New Zealand shares hit a three-month low yesterday after warning its annual earnings will fall by as much as 37 percent.
Air NZ cut its forecast for pre-tax earnings to $340-400 million in the year ending June 30, blaming ongoing global issues with the Rolls Royce engines that have disrupted schedules. At the same time, smaller increases in domestic travel and inbound tourism weighed on revenue, prompting schedule adjustments to increase capacity 4 percent for the year, the bottom of its 4-6 percent guidance.
We do not see reason to panic, and continue to believe the tourism boom tailwind will be a multi-year trend given the continued affordability of travel and growing Asian middle class. The airline's operating statistics showed a 4.5 percent increase in passengers carried across the group to 1.77 million in December, taking the year-to-date tally to 8.9 million, a gain of 4.3 percent. Another positive is that the dividend policy is unchanged at the moment.
Members should look out for a full update on Air NZ to be released in our next weekly report.
Australia & New Zealand Market Movers
The Australian share market closed higher yesterday (ASX 200 index +0.21%) after a fluctuating trading session with the resources sector putting in a strong performance. A sharp decline in national carrier Qantas kept the market in check, as Qantas followed sentiment around Air NZ lower.
The New Zealand market sold off again in Wednesday (NZX 50 index -0.90%) led lower by Air New Zealand, as the national carrier's earnings and softer outlook weighed on other tourism-related companies. Auckland International Airport and Tourism Holdings were the major casualties.
3 Things Markets Will be Watching this Week
- US corporate earnings season continues this week.
- The US Federal Reserve makes its first monetary policy decision for the year on Thursday morning (AU/NZ time).
- The UK parliament votes on a new Brexit plan on Wednesday morning (AU/NZ time)
Have a Great Day,