NZ Economy - Overview 1 GDP growth above trend, while inflation pressures remain muted Leading indicators suggest a near-term annual GDP growth rate around a robust 3.-3.% YoY level Current supportive factors include: Historic high net migration Strong tourism growth Robust construction sector activity housing and growing infrastructure spending Low interest rate settings Current negative factors include: Domestic growth weaker on a per capita basis Migration cycle creating stresses in the economy Excessive house price inflation increases financial stability risks Dairy prices continue to remain below average NZ dollar exchange rate remains elevated impacting export competitiveness Slow global growth and risk of rising protectionism GDP growth is expected edged up from.% in 1 to 3.3% in 1
NZ Economy Business & Consumer Sentiment Positive GDP growth above trend, while inflation pressures remain muted Confidence Strongest In Services, Weakest In Manufacturing - - - - Jun-9 Dec-1 Jun-1 Dec-13 Jun-1 Total Retail Manufacturing Agriculture Construction Services Source: ANZ, First NZ Capital Activity Outlook Suggests GDP Growth In Excess Of 3.% YoY - Ow n-activity shifted fwd by 1 quarter - Mar-9 Mar-9 Mar- Mar- Mar-1 Mar-1..... -. -. Own-activity - lhs GDP - rhs FNZC Forecasts - rhs Business Sentiment Modestly Above Average Levels 1 1 - -1 Apr- Jan-93 Oct-97 Jul- Apr-7 Jan-1 NZ Recessions - Shaded Business Confidence Survey Average Source: ANZ, First NZ Capital Consumer Sentiment Suggests Growth Around 3.% YoY 1 1 1 - - Aug-3 Aug- Aug-7 Aug-9 Aug-11 Aug-13 Aug-1 GDP - rhs Consumer Confidence (shifted fwd m) - lhs Source: Statistics NZ, ANZ Roy-Morgan, First NZ Capital Source: Statistics NZ, ANZ, First NZ Capital
NZ Economy Rising Population Consumption supported by a rising population and a sharp increase in overseas visitor arrivals 3 Rising Retail Spending Supported By Population Growth 1 - - - - Sep- Sep-7 Sep-1 Sep-13 Consumption Growth Outpaces Consumer Sentiment 1 1 13 1 11 1-9 - - Jan- Jan- Jan- Jan-1 Jan-1 Jan-1 Jan-1 Total Retail Sales Retail Sales Per Person Consumer Confidence - lhs Private Consumption - rhs Source: Statistics NZ, ANZ Roy-Morgan, First NZ Capital Sharp Rise In Overseas Visitor Arrivals Strengthening Visitor Arrivals Supports Broader GDP Growth 3,, 3,, Arrivals,,,, Departures 1,, 1,, Jan-3 Jan- Jan-9 Jan-1 Jan-1 1 1 - -1 Jun- Jun-93 Jun-9 Jun-3 Jun- Jun-13 7 3 1-1 - Overseas Vistor Arrivals NZ Resident Departures Visitor Arrivals - lhs GDP - rhs
NZ Economy Migration & House Prices Historic high net migration, an Auckland underbuild, increased investor activity and low interest rates support house prices Wide Gap Between Auckland Prices And Other Regions $1,, $, $, $, $, $ Jan-9 Jan-9 Jan- Jan- Jan- Jan-1 Jan-1 NZ Auckland Wellington Christchurch Other NI Other SI Source: REINZ, First NZ Capital The Rate Of Auckland House Price Growth Eases Back 3 1-1 - Jan-7 Jan-9 Jan-11 Jan-13 Jan-1 NZ Auckland Wellington Christchurch Other NI Other SI Source: REINZ, First NZ Capital Auckland House Price-To-Income Ratio At Historic Highs Historic High Net Migration Supports Housing Activity 1 Mar- Mar-3 Mar- Mar-9 Mar-1 Mar-1 3 7,,,, 3,, 1, -1, -, Jan-93 Jan-97 Jan-1 Jan- Jan-9 Jan-13 1 1 - -1 House Price-to-Income - lhs Rental Yield - rhs Net Migration - lhs House Prices - rhs Source: RBNZ, First NZ Capital Source: Statistics NZ, REINZ, First NZ Capital
NZ Economy GDP Growth GDP growth above trend, while inflation pressures remain muted GDP Per Capital Growth Rate A Relatively Modest 1.% YoY - - Jun- Jun-93 Jun-9 Jun-3 Jun- Jun-13 GDP GDP Per Capita GDP Per Capital Growth Rate Tracks Below Average - - Mar-9 Mar-97 Mar- Mar-7 Mar-1 GDP Per Capita Average Since Mar-9 Near-Term GDP Expected To Be Around 3.-3.% YoY Consensus Forecasts For Growth Of 3.% YoY% For 1 7 Fcst Avg. since 199 3 1-1 - -3 Mar-9 Mar-99 Mar-3 Mar-7 Mar-11 Mar-1. 3. 3... 1. 1... 3. 3. 3.... 1 17 QoQ% change YoY% change High Mean Low RBNZ Aug-1 MPS Source: Consensus Forecasts, First NZ Capital
NZ Economy Inflation Trends Headline CPI dampened by weakness in tradeables inflation; inflation expectations lower RBNZ Monetary Policy retains explicit easing bias CPI Inflation Of.% YoY Well Below The 1-3% Target Band.... -. Mar-9 Mar-99 Mar-3 Mar-7 Mar-11 Mar-1 QoQ % YoY % Headline CPI Dampened By Weakness In Tradables Inflation - - Mar- Mar-3 Mar- Mar-9 Mar-1 Mar-1 Mar-1 Source: Statistics NZ, RBNZ, First NZ Capital Tradables Non-tradable CPI Fcst 1 9 7 3 1 RBNZ s Core Measure of Inflation Unchanged at 1.% YoY Inflation Expectations Subdued And Risk Embedding Lower... 3.. 1.. Mar- Mar-3 Mar- Mar-9 Mar-1 Mar-1 Headline Trimmed Mean Sectoral Factor Model Weighted Median Source: Statistics NZ, RBNZ, First NZ Capital 3 1-1 Jan-9 Jan- Jan- Jan-1 Jan-1 CPI - lhs Inflation Exp. - rhs Source: Statistics NZ, ANZ, First NZ Capital. 3. 3... 1. 1.
NZ Economy - RBNZ Monetary Policy 7 RBNZ retains an explicit easing bias, suggesting that further policy easing will be required RBNZ Cuts OCR By bps to.% & Projects A Further Cut Weaker Inflation Prompts A Pattern Of Lower OCR Settings 3.7 3. 3. Fcst 3..7... 1.7 Mar-1 Sep-13 Mar-1 Sep-1 Mar-1 Sep-19 1 9 7 3 1.... 3. 3... 1. Mar-1 Mar-13 Mar-1 Mar-1 Mar-1 Mar-17 Mar-1 Mar-19 Source: RBNZ, First NZ Capital Aug-1 MPS Jun-1 MPS Jun-1 MPS Sep-1 MPS Dec-1 MPS Mar-1 MPS Jun-1 MPS Sep-1 MPS Dec-1 MPS Mar-1 MPS Jun-1 MPS Aug-1 MPS Source: RBNZ, First NZ Capital RBNZ Presents Two Downside OCR Scenarios Estimate Around A 3% Probability Of A Sub-1.% OCR. 3. 3... 1. 1.. Mar-1 Mar-1 Mar-1 Mar-1 Central Higher NZD Lower Inflation Expectations. Source: RBNZ, First NZ Capital 1.7% 1.% 1.% 1.% Sub- 1% % 1% % 3% % Source: First NZ Capital Estimated OCR Level Probabilities
NZ Dollar Forecasts RBNZ comments that a decline in the exchange rate is needed NZD/USD Forecast NZD/AUD Forecast.9. Fcst 1 9 1..9 Fcst 1 9. 7.9 7.7..7 3. 3..7 1 1. Jan-11 Jul-1 Jan-1 Jul-1 Jan-17.7 Jan-11 Jul-1 Jan-1 Jul-1 Jan-17 NZD/USD NZD/AUD Source: Credit Suisse, First NZ Capital Source: Credit Suisse, First NZ Capital NZD/EUR Forecast Credit Suisse NZ Dollar Forecasts.7 Fcst..... Jan-11 Jul-1 Jan-1 Jul-1 Jan-17 1 9 7 3 1 Credit Suisse FX forecasts Spot Forecasts Forecasts 13-Oct-1 3M 1M NZD/USD.7.73.79 NZD/AUD.937.9.93 NZD/JPY 73.3 9.9. NZD/EUR..9.7 NZD/GBP.79.. Source: Credit Suisse, First NZ Capital NZD/EUR Source: Credit Suisse, First NZ Capital
NZ Equity Market Prospects Earning Yield v Bond Yields 9 Valuations full, but yield-based stocks supported Earning Yield Remains Attractive Relative To Bond Yields 1.7.1 Jan-9 Jan- Jan- Jan-1 Jan-1 Prospective Earnings Yield NZ -yr Bond Yield Source: IRESS, First NZ Capital Dividend Yields Continue To Outpace Bond Yields 1 Jan-9 Jan- Jan- Jan-1 Jan-1 Prospective Dividend Yield NZ -yr Bond Yield Source: IRESS, First NZ Capital..1 Earnings Yield Gap Still Supportive PE Multiple of 1.x Above 1-Year Average Of 1.3x 7,., Buy.., 3.,. 3, 1.., Sell -1. 1, -. Mar-1 Mar- Mar-7 Mar-1 Mar-13 Mar-1 Earnings Yield Gap - rhs NZXG - lhs 1-yr avg 1 1 1 1 Based on rolling 1mth ahead forecasts 1 Jan-93 Jan-9 Jan-3 Jan- Jan-13 1. 1.3 Source: IRESS, First NZ Capital Source: IRESS, First NZ Capital
NZ Equity Market Prospects Market Fully Priced 1 Real NZ Equity Market Cycles Compared 11 1 9 7 3 Real Equity Market Cycle Above Average in Duration And Size 179.1 17. 1. 11.9 1 11. 1. 9.9. 31. - -.3-7. -.7-1.1 -.9 -. -7. -.9 -.7 -. -1 19. 1 9 7 3 1 1 Dec-9 to Sep-9 Sep-9 to Feb-9 Feb-9 to Sep-1 (so far) Source: Statistics NZ, Datastream, IRESS, First NZ Capital Historic High P/E Ratios Supported By Low Bond Yields 1 1 Current Previous NZ equity peaks Source: Statistics NZ, Datastream, IRESS, First NZ Capital Recent Returns Suggest Muted Market Gains Going Forward % 1% 1% % % -% 1 1 1 NZ 1-Year Bond Yield -1% -% -1% % 1% % Real Returns Over The Past -Years Source: Statistics NZ, Datastream, IRESS, First NZ Capital Source: Statistics NZ, Datastream, IRESS, First NZ Capital
11 NZ Economic Prospects Summary New Zealand Economic Forecasts December Years 1 1 1 17 Gross Domestic Product (1) GDP 3.. 3.3.9 GDP (Dec. qtr on Dec. qtr).1.3 3.3. Private Consumption.7.3 3. 3. Residential Investment 1..9 1.. Business Investment 9.9. 3.7. Gross National Expenditure.. 3.7 3. Exports of Goods and Services 3.1..3.1 Imports of Goods and Services 7.9 3. 3.3. Inflation () CPI..1 1. 1. Government Accounts (June years) Underlying Operating Balance (NZD bn) -.. 1.. % of GDP -1...7.1 External Accounts Current Account Balance (NZD bn) -7.7 -.3-7. -9. % of GDP -3. -3. -.9-3. Labour Market Employment () 3. 1.3. 1. Unemployment Rate.... (1) Annual average percent changes () December quarter to December quarter percent changes (3) Average level for December month
NZFMA Current Focus 1 Benchmark Activities Underlying market trading liquidity Closing Rate project Trading conduct interpretation during rate sets Governance Regulator engagement Managing Regulatory Change Trading conduct during rate sets Financial Market Conduct Act Central Clearing of Derivatives Close-out netting legislation Cross border regulation benchmarks equivalence and margining of uncleared derivatives