Market Update – May 2019

Last month we wrote about the significance of the dovish positioning from the central banks around the world led by the Fed backing off interest rate increases earlier in the year. This response from central banks worked to support markets and was essential to offset investors’ concerns around slowing global growth. The relationship between slower growth and low interest rates remains a central theme to the global economy and is a key consideration for investors.

There were some positives in April to restore some confidence that a slowdown in global growth was previously overstated by some commentators. Trade flows are picking up in Asia, America’s retail sales have been strong and even Europe’s beleaguered manufacturing industry has shown flickers of life. Also positive, albeit retrospective, was the news that the US delivered beyond market expectations for first quarter 2019 GDP growth, while defying claims of a possible earnings recession.

However, it would not take much bad news to reinstate caution. The global economy has slowed and further downwards momentum, or a new negative shock, could further weaken economic prospects. Policy risks in the form of deteriorating US-China trade relations and a No-Deal Brexit remain key threats too.

US – Economy boasts +3.2%… but still no inflation

The US economy defied fears of a first-quarter slowdown, overcoming a prolonged government shutdown, trade tensions and global economic uncertainty to deliver growth that trounced analysts’ expectations. Gross domestic product rose at an annualised pace of 3.2 per cent during the first three months of the year, handily topping Wall Street predictions for 2.3 per cent growth. It is also an improvement from the 2.2 per cent pace of expansion recorded during the fourth quarter of 2018. The robust reading is a boost for economies around the world after a growth scare earlier this year triggered a fall in bond yield.

The data quelled previous fears that the US is running into an imminent recession and leaves the economy on track to hit its longest-ever expansion later this year. But beneath the impressive headline growth figure, some of the underlying detail in the report was less buoyant. Consumer spending slowed from the fourth quarter and growth relied heavily on a build-up in inventories, which could reverse later this year. The report will further complicate the policy deliberations at the Federal Reserve, which is weighing firm headline growth and a resilient labour market against perplexingly soft inflation as it considers whether the next move in rates should be down rather than up.

The US central bank, led by chairman Jay Powell, is likely to keep policy unchanged at 2.25 to 2.5 per cent for the more immediate future. With US activity improving after a shaky start to the year and overseas risks diminishing, many commentators suggest the Fed will likely keep rates at their current level for the remainder of the year.

US-China trade negotiations – high hurdles remain

As U.S. and Chinese officials try to close a trade deal, the punitive tariffs the governments slapped on each country’s goods in the conflict stand as a major obstacle. High-level talks between the U.S. and China recently resumed in Beijing. As they work through final issues, including planned Chinese purchases of U.S. goods, how and whether to remove the tariffs the two governments imposed in the earliest phases of the dispute are now at the forefront of the talks. At issue is how much of the tariffs the U.S. levied on $250 billion of Chinese goods will be removed. The U.S. wants to leave some in place as a tool to enforce the agreement while Chinese negotiators see those tariffs as an affront, and negotiators have batted the issue back and forth for at least a month.

One can be confident Beijing won’t want to accept a deal where the U.S. continues to insist on imposing tariffs, and prohibits China from retaliating, as a way to make sure Beijing fulfils commitments in a trade deal. The tariffs would be embarrassing for the leadership and politically difficult to sell to Chinese businesses and other domestic constituencies. The current tariffs also created uncertainty for investors, compounding last year’s slowdown in the Chinese economy.

Europe – Some green shoots

In March this year, the narrative surrounding the euro region was driven by fears of ‘Japanification’ (describing the environment of deflation and expansionary monetary policy such as experienced in Japan). The manufacturing Purchasing Managers’ Index (PMI) for the region had declined, despite a rise in PMIs around the world. At the same time, the European Central Bank extended their forward guidance for the period in which rates will remain negative to the end of the year, raising the prospect of a negative rate trap (where target interest rates are set below zero) for the region and its banks. Just one month later the macro view of Europe is turning more positive. Business confidence is still low but has recently posted its first increase in six months and retail spending has improved, supporting the case that strong labour markets will continue to support household spending. However more generally, across Europe confidence continues to wane across all sectors, which suggests activity indicators will continue to print on the soft side and interest rates will remain low for the foreseeable future.

UK – Kick Brexit down the road

In our April economic report, we wrote about the chaos created by Brexit and apparent lack of a clear and viable way through. Since then not much has changed except to provide for more time (31 October is the third ‘final’ deadline). Mrs May asked the EU for more time because MPs voted down her exit deal three times. Getting the House of Commons’ bipartisan approval for the draft treaty is still a big challenge, unless the talks between the Conservatives and Labour produce a breakthrough. But the Prime Minister is wishful that the deal can be approved and ratified before May 23, so Britain can avoid holding elections to the European Parliament that day.

In a blow to the chances of a second referendum, Jeremy Corbyn has seen off a challenge from Labour’s Europhile wing, defeating a bid to commit the party to holding a second EU referendum in all circumstances. The Labour leader announced afterwards that the party would maintain its existing policy of backing a soft Brexit with a customs union. He added that Labour would support the “option” of a public vote only if it was unable to secure the changes to the government’s existing withdrawal deal and could not force a general election.

Australia – Location, Location, Location

Across the Tasman, Australian economic growth remains constrained as the housing market in Sydney and Melbourne continues to negatively impact consumer spending and housing construction. The labour market is holding up well, but the softening in the housing market is expected to hit jobs related to construction, housing services and retail, and cause a rise in the unemployment rate. Business investment growth is improving as mining investment is no longer acting as a large drag on the economy, but non-mining business investment remain underwhelming.

Sydney’s median house price will fall below $1 million within the next two months even if the property downturn eases slightly from its current pace. Sydney house prices have now fallen 14.3 per cent from their mid-2017 peak, including a drop of 3.1 per cent over the March quarter. Melbourne house prices fell 10.4 per cent over the year and 2.4 per cent over the quarter.

An election later this month is likely to see a new Labour-led coalition. This has the potential to bring some policies which are business unfriendly.

New Zealand – following the herd

New Zealand GDP growth, emblematic of the global economy, shifted down a gear as the data for second half of 2018 was disappointing, and rising capacity constraints will continue to have a moderating influence on growth in activity. There are tailwinds, largely on the back of fiscal stimulus and growth in labour income.

According to the ANZ Business Outlook Survey, business confidence and firms’ own activity outlook were little changed in April with both remaining at levels well below their long run average (47pts below and 20pts below respectively). Capacity utilization fell to a new post-GFC low.
The RBNZ signalled a material dovish pivot at its April meeting part of which highlighted concerns around a slowdown and ongoing weak business surveys. There is little in the ANZ survey to allay the RBNZ’s concerns on the latter. The RBNZ decided to cut the OCR by 25bp at its May meeting.


We are cautiously positive on equities because economies around the world are still expanding at decent rates and there are no apparent inflation trends. While there are risks that could push the markets periodically downwards, we believe that last year’s bearish moves restored some value to the markets and interest rates now look to be heading lower, not higher.

We believe that maintaining your long-term neutral asset allocation continues to be appropriate in light of the environment.


Information and Disclaimer:

Source:JMI (previously JMIS), the investment consultant to the Select Wealth Management service.

This report is for information purposes only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should contact Miles Flower on 021 645 000.

The role of your adviser

Sell, sell, sell!!! Over the last few weeks, stock markets around the world have taken a bit of a battering leading some to suggest(1) that we are now seeing the beginnings of a recession. If that’s the case it could well mean that there is still some way to go before markets start to recover.

Buy, buy, buy!!! Conversely, there are also indications that economic fundamentals are still strong, that the bottom has been reached and markets start to recover some of their recent losses over coming weeks and months.

What should you do with your investments? If you believe the recession scenario, you may decide exit the markets (or just reduce the market exposure of our investments) and wait until there are signs of a recovery. However, taking steps now to reduce your exposure to the market could have one of 2 outcomes…either you’re right and you stem any further reduction in the value of your investment and you can buy back into the market at a lower price later on (assuming, that is, that you are lucky enough to time your buy on an upward swing) or, your hunch is wrong and you have to buy back into the market at a higher price in which case you’ve missed out on some gains in the mean time.
Ultimately the outcome can only be known with hindsight and often not until quite sometime later. Which really brings me to my main point in this article:

We can’t control the markets but we can control our response.

At Moneyplanners, when it comes to helping our client build and protect wealth, we are strong advocates of the principle: time in the market NOT timing the market. The money we manage for our clients is a long term investment, typically 10 years or more and, in that time the law of averages (based on historical returns!!) suggests we can expect to see at least one significant downturn (20% plus) and a strong probability of a recession lasting at least 12 months. But in the last 90 years or so, there have also been extended periods of more than 10 years of market growth…such as our recent experience since the GFC. The point here is that historical averages are not particularly useful in predicting the future.

Our goal in helping you manage your investments is not to outperform the market…our role is to help you keep your head while everyone else is losing theirs.

Which brings us to our role as your financial adviser. It’s typically during downtime’s in the market that our role becomes really important…and, perhaps not for the reason you might think. There’s a ‘back of the napkin’ sketch in a blog entitled behavior gap which in a very simple way describes the most important role we play as your financial adviser:


Our goal in helping you manage your investments is not to outperform the market…’s not to add “alpha” to market return…our role is to help you keep your head while everyone else is losing theirs. Our role is to be the voice of reason when investment markets are all over the place…by being there to help you control what you can control – your response to a market downturn. Sometimes that can be hard but, it’s been shown time and time again that by trying to time your moves into and out of the market you end up much worse off than if you’d stayed the course.
So, the recent market turmoil will likely have an impact on your’ll likely see a reduction in value. However, it’s not a loss unless you sell…your investment is for the long term and market corrections happen from time to time. But it doesn’t have to affect your long term investment goals.
Feel free to get in touch if you have any concerns about what is happening or would like to sit down and review your investment goals.
Further reading

Good Money Reads for the Holidays

With Christmas in a couple of weeks and the prospect of a well earned break, many of us use the opportunity to catch up on some reading. If you’re interested in personal finance or investing, you may like to check out some of our favourite money reads this year:

(Please note the links on the images are to fishpond – a new zealand-based distributor. If you click on the link and subsequently purchase the book, Moneyplanners will receive an affiliate fee. We only recommend books that we ourselves have read.)

The One-Page Financial Plan by Carl Richards.

Carl Richards is one of our ‘reference points’ for matters relating to behavioural finance. He writes (draws!!!) a regular column for the New York Times (the Behavior Gap – which is worth subscribing to). He has this uncanny ability to make sense of relatively complex ideas through back of the napkin doodles!!! The one-page financial plan is a bit of a misnomer BUT his approach is really compelling. Rather than starting with your goals and taking a look at your budget and net worth, this book approaches financial planning from a different perspective by asking the question: why is money important to you. The answer to this question, underpinned by your own unique value system, drives everything else related to how you should structure your financial affairs. We also like how the book suggests a subtle (but important) shift from the term financial goals to ‘financial guesses’. This is an excellent book and an easy read without unecessary financial jargon.


A Wealth of Common Sense by Ben Carlson.

Ben is also one of our favourite personal finance bloggers. His Wealth of Common Sense blog is one of the few that I always read. This book takes the complexity out of investments and focuses on the most important topics which affect investment outcomes. Taking a practical approach to investments, this book takes a look at some of the enduring myths about investing as well as discussing and delving into some of the most important aspects of developing a personal investment plan. Like Carl Richards, Ben has a good understanding of how our behaviour affects outcomes when is comes to money matters.




The opposite of spoiled by Ron Lieber

I came across this book fairly recently (interestingly while reading a post in Ben Carlson’s blog (see above!!) and ordered it from the library. Ron Lieber is the New York Times personal finance columnist. This excellent resource provides a wealth of practical down-to-earth advice about including kids in conversations about money and how to turn those conversations into lessons about life. The book starts with the premise that it’s hard to come up with a word which is the opposite of spoiled, Instead the author sets out to identify a set of traits and virtues which embody the opposite of spoiled and along the way shares “how to embrace the topic of money to help parents raise kids who are more generous and less materialistic.” If you’re the parent of school-aged children or a grandparent of such kids, this is an excellent resource to help you to teach those kids to be better with money than we are.


Investment Property or Managed Fund: a retiree’s conundrum

IMPORTANT PLEASE READ: The information in this article is not personalised advice. The findings and conclusions relate to a specific client situation which may or may not be relevant to your situation. Furthermore, the analysis herein is relatively academic as it is based on historic returns which are not a good indicator of prospective future returns. You should seek professional investment advice BEFORE deciding whether or not to invest in any type of investment. 


A retired couple we know recently announced that they had bought an apartment at a retirement village. It is expected that they will move in early next year. When they do, they will also have to decide whether to sell their current property (a small 1 bedroom apartment on the shore) and invest the proceeds or keep it as an investment property.


The variables behind this decision led me to do some research around which of the two options would be better from an investment viewpoint. What follows are my findings.


Investment property often gets a bad wrap in the financial planning world for a number of reasons perhaps the biggest being that having a large sum invested in a single asset runs counter to one of the key principles of investing; diversification. If we park this for a moment how does residential investment property stack up against for example a managed fund? One of the key benefits of investment property over other types of investment is the ability to easily leverage returns by borrowing to fund the purchase. So, for example, if you were to borrow 80% of the purchase price of a property, the return on the funds you actually invested will be enhanced fivefold.


Let’s return for a minute to our retired couple’s situation….they are debt free on their current home so by holding on to the property, they won’t be gaining the benefits of leverage. This means we can conduct a relatively direct comparison between property and (for the purposes of simplicity and available data) a managed fund.


So let’s take a look at the numbers over the last 25 years. For this exercise I have used a couple of relatively broad brush measures of return for each investment type.


Variables and assumptions

  1. For residential investment property, I have used the New Zealand housing price index for the last 25 years. here.
  2. For an alternative, I have used a highly regarded balanced growth fund from one of New Zealand’s  leading superannuation schemes.
  3. I have only looked at property values over time and have ignored rental income on the investment property for the sake of simplicity and due to the fact that such income will depend on the nature and location of the property. Furthermore, there are maintenance and operating costs associated with investment property which dont apply to managed funds.
  4. For this exercise, I compared the relative value of $1 invested into residential property (using the Reserve Bank all NZ housing index) versus $1 invested into the reference fund (Balanced Growth) on the 31st March in each reference year. I used 5 year, 10 year, 20 year and 25 year reference periods.


Key Results

Value of $1 invested
31st March 2013
31st March 2008
31st March 1998
31st March 1993
Property Value 31st March 2018
Fund Value 31st March 2018


It was interesting to note that, with the exception of the 10 year timeframe, investment property provided better growth than a balanced growth fund.
As a result of this initial analysis, I took the opportunity to explore results over the last 18 years (I only had data going back to 1993 for the balanced fund in question) and the results provided some interesting reading. The following table summarises my findings. For the year ended 31st March in each year, the table shows which option performed better over the timeframe indicated and the relative difference in overall growth (measured by reference to the end value of the investment e.g. for the 20 years  ended 31st March 2017 a $1 investment in property would have been worth approximately $3.56 versus an approximate $2.97  for $1 invested in the reference balanced growth fund. – a difference of 22%.
Results and Materiality

 Year ended 31st March  25 Years 20 Years 10 Years 5 Years
2018 Property 15% Property 22% Fund 20% Property 4%
2017 Property 20% Fund 4% Fund 3%
2016 Property 5% Property 24% Fund 29%
2015 Property 0% Property 10% Fund 22%
2014 Property 20% Property 14% Fund 41%
2013 Property 15% Fund 15% Property 11%
2012 Property 8% Property 21%
2011 Property 18% Property 17%
2010 Property 53% Fund 10%
2009 Property 35% Property 3%
2008 Property 14% Fund 25%
2007 Property 3% Fund 14%
2006 Property 12% Property 1%
2005 Property 21% Property 41%
2004 Property 34% Property 78%
2003 Property 36% Property 70%
2002 Property 62%
2001 Property 35%

So what should this couple do with their property?

When I first started looking at this, I had expected to find their best option (from a purely economic viewpoint) would be to sell the property and invest into a diversified portfolio of stocks and bonds or managed funds. However, my (albeit limited) analysis suggests otherwise – at least in their situation (this is important – see below!!). On the basis that they won’t need the funds invested in the property for many years (if at all), there is no really compelling argument to sell just yet – in fact, the findings and their other investments suggest otherwise.  There are, of course, other factors which may influence their decision – such as the practical aspects of owning a property – maintenance, collecting rental, tax implications, etc, but from a purely economic viewpoint, it would make sense for them to hold on to the property and use the rental income to supplement their other income sources (to the extent they need to.


My conclusions for this article are specific to this couple’s situation. There are some important factors which affect the recommendations which are unique to them;
1. They have no other property.
2. They have access to a substantial well diversified portfolio of shares, bonds and fixed interest investments which supports their income needs during retirement.


If you would like to discuss your investment needs, please get in touch with Miles – 021 645 000.

Investment Update July/August 2016

Unexpectedly, in late June, the British voted to leave the European Union (EU), a decision which now leaves the world’s fifth largest economy facing deep uncertainty about its future growth prospects.  This decision in the UK will also hurt the economies and markets of the EU and beyond.

The Brexit vote initially triggered a sharp downturn in share values, particularly in Europe, and a strong rally in safe haven assets like bonds and gold.  The pound also suffered a swift devaluation.

This is an unexpected political crisis rather than an economic or banking crisis like the 2008 Global Financial Crisis.  In economic terms, it is likely to lead to a modest UK recession as well as an ensuing slowdown in the EU, along with a period of considerable political turbulence in the UK and Europe.

Even aside from Brexit, global economic conditions are still far from robust. The existence of near zero or negative interest rates in many countries indicates something very unusual is happening. In early June, the World Bank has recently slashed its global growth forecast for 2016 to an “insipid” 2.4% amid what it calls stubbornly low commodity prices, faltering growth in advanced economies, weak global trade and shrinking capital flows. In January, the Bank had forecast global growth of 2.9% for 2016. The latest downgrade to 2.4% reflects slides in the prices of commodities, including oil and iron ore, and an inability of countries that benefit from the lower prices to use them to bolster growth.  After Brexit, a further down grade now looks likely.


The World Bank cut its forecast for the United States growth from 2.4% to 1.9% in 2016.

In mid- June, the Federal Reserve pushed back its plans to raise its benchmark short-term interest rates, a widely-expected move following a series of mixed US economic reports, particularly in employment data. Although the unemployment rate has declined to 4.7% now, job gains have diminished.

The cautious stance comes after an unexpectedly weak payrolls report in which the US economy added only 38,000 jobs in May, the lowest level in six years.  Brexit is likely to delay interest rate rises in the US even further.

Meanwhile, on the plus side, inflation, which has run below the Fed’s 2% target for four years, has shown signs of strength in recent months, as oil prices and the US dollar stabilised.


The World Bank cut its forecast for growth in Japan from 1.3% to 0.5% in 2016.

In June, the Prime Minister changed his mind and kept the consumption tax unchanged to assist internal demand and growth prospects.


The World Bank held its forecast for China’s growth rate at 6.7%.

Soaring corporate debt is a serious and worsening problem in China that needs to be tackled quickly if Beijing wants to avoid potential systemic risk to itself and the global economy.  While China’s total debt of around 225% of gross domestic product is not particularly high by global standards, its corporate debt at approximately 145% of GDP is high by any measure.


The World Bank held its forecast for the Euro area at 1.9% in 2016.

With policy interest rates approaching their lower bounds and the Euro yield curve already very low and flat, the focus on macro-economic policy discussion has now switched towards possible fiscal policy in Europe.

The UK’s decision to leave the EU now puts further pressure on EU growth, and asks the question: what are the likely responses now from the European central bank?


In early June, the Australian Reserve Bank kept interest rates on hold at 1.75% and delivered a statement that gave no indication that it is inclined to ease monetary policy any time soon.

The general election result in early July is looking to be a close contest with polls suggesting a narrow Liberal victory.

New Zealand

In early June, the Reserve Bank left the Official Cash Rate unchanged at 2.25%. At this time, it said:

“Global financial market volatility has abated and the outlook for global growth appears to have stabilised after being revised down successively over recent quarters. There has been a modest recovery in commodity prices in recent months. However, the global economy remains weak, despite very stimulatory monetary policy and significant downside risks remain.

Domestic activity continues to be supported by strong net immigration, construction, tourism and accommodative monetary policy. The dairy sector remains a moderating influence with export prices below break-even levels for most farmers.

There continue to be many uncertainties around the outlook. Internationally, these relate to the prospects for global growth and commodity prices, the outlook for global financial markets, and political risks. Domestically, the main uncertainties relate to inflation expectations, the possibility of continued high net immigration, and pressures in the housing market.

Monetary policy will continue to be accommodative. Further policy easing may be required to ensure that future average inflation settles near the middle of the target range”.


Brexit brings with it heightened uncertainty and financial markets certainly do not like the unknown.  We therefore expect a period of weaker and more volatile share markets. We also expect a low interest rate environment for even longer now.  We expect investors to be more cautious, maybe to adopt a “wait and see” strategy.

We feel that accommodative monetary policy settings in most jurisdictions around the world will probably continue to be broadly supportive of markets, however we have now had over 7 years of rising share prices and corrections in some markets are more likely to occur as investors adjust their risk positions and “take some profits”.

For some months, to control portfolio risk, we have recommended to clients that their investment portfolios should be well aligned to their long term strategic asset allocation positions and well diversified.

Source: JMIS, investment consultant to Select Wealth Management