Mark Lister, 10 July 2018

Business confidence has collapsed in recent months, suggesting a sizeable loss of momentum. At the same time, we’ve seen the sharemarket hit record highs in recent days.

If business conditions are that bad, it makes no sense for a key barometer of prosperity to be headed in the other direction. They can’t both be right, can they?

The ANZ Business Outlook for June saw sentiment fall very close to the lowest since March 2009, in the depths of the GFC. We have now seen business confidence in negative territory for nine consecutive months, the longest stretch in more than a decade.

It's difficult to argue this is simply a kneejerk reaction to a new regime, although some politicians will naively continue to try. The caution looks here to stay, and I’ll be surprised if it isn’t a precursor to slower economic activity.

While uncertainty around key areas of government policy is clearly a major factor, there’s also an element of natural slowdown reflected these survey results. Auckland house prices are no longer rising, migration is the lowest in more than two years and construction is in the doldrums.

Meanwhile, in June the local sharemarket posted its best monthly gain in almost two years. That capped off a quarter which saw the NZX 50 index rise 7.5 percent, and in July it’s pushed on to further record highs.

The sharemarket should be one of the best economic indicators around, so why is this performance at odds with what we’re hearing from the business community?

For a start, it’s not all bad out there. Unemployment is at a ten-year low, government debt is at very modest levels and our export sector is in excellent shape. Prospects for exporters have improved further in recent months, with the currency falling sharply against all major trading partners.

That’s a big positive for listed companies, many of which have substantial international operations. Unlike years gone by, it’s easy to find quality businesses on our sharemarket where more than half of revenues come from outside New Zealand.

These companies will be less concerned about slowing domestic growth. In fact, if it leads to a lower NZ dollar some will welcome it.

Another reason for the strength of our market is the ongoing attraction of high dividend paying shares. The higher proportion of utilities, infrastructure and property companies means the average dividend yield is about to five percent per annum, higher in many cases.

Softer growth means the Reserve Bank is much less likely to raise the Official Cash Rate anytime soon. They’ve even raised the prospect of cutting it, which isn’t as outlandish as it sounds when you consider the backdrop of trade tensions and other risks.

Ironically, a more subdued outlook seems to have delivered our exporter and high-yield dominated market two things that have improved its prospects, namely a weaker currency and a lower probability of interest rate rises.

While things are buoyant for now, the true test will come during the corporate reporting season in August. That’s when we’ll find out if lower business confidence is a reflection of the real risk to share prices - falling profits.