Axiome December 2017 update

Equity markets surged in late 2017 and closed on record highs, including in New Zealand and the United States.  On an annual basis, equities returned over 20% in NZ and developed markets, whilst emerging markets returned 35%.  Bond returns were more subdued in the low single digits, but still comfortably ahead of short-term cash rates in most economies.

The catalyst for the end of year surge was the passage of very large corporate tax cuts in the United States, reducing their headline rate from around 35% to 21%.  This increases profits for investors into US equities, and no doubt will put pressure on other governments to consider whether their rates remain competitive.  Notably, headline statutory rates in New Zealand (28%) and Australia (29%) are now higher than the average OECD corporate tax rate of 24%, and much higher than the rates seen in advanced economies such as Switzerland, Ireland, Germany and Canada.

While US tax cuts played the lead role in recent surging share prices, the benign macroeconomic environment also continues to support strong corporate earnings that are flowing through to strong markets.  Global and New Zealand monetary policy settings remain very accommodative despite rate hikes in the US over 2017, fiscal policy in most countries is no longer tight (i.e. austerity programs have largely ended) and global growth is solid, with all countries that comprise major MSCI indexes currently expanding.