Investment Update – March 2018

Photo by Ken Teegardin on Flickr

Aside from the February turbulence in equity markets, global economic growth should hold up well and inflation should remain low in 2018.

The recent hard economic data and survey evidence suggest that the world economy is growing at a rate over 3% pa and there is enough spare capacity in many economies for the expansion to continue for a while yet.

Meanwhile, although central bankers are reducing their policy support for this growth, they are doing so only gradually because inflation generally remains low. One explanation for the recent slump in equity and bond prices is that investors have become concerned that inflation is about to take off, forcing central bankers to tighten policy more rapidly than previously expected. However, underlying inflation has remained low and stable, even in economies which are closest to full employment.

Non-farm payrolls increased by 200,000 in January, following an upwardly revised 160,000 in December, and beating market expectations of 180,000. The share market reacted sharply downwards at the beginning of February to this strong number accompanied by private sector hourly wages increasing from +2.5% to +2.9%. This very good fundamental economic news was interpreted negatively in the context of a rising risk for inflation, and therefore interest rates. In fact, the jump to 2.9% year-on-year in January, which triggered the market sell-off, was exacerbated by temporary weather patterns and may yet be reversed.

The surge in the Conference Board’s consumer confidence measure to a 17-year high of 130.8 in February, from 124.3, underlines that household sentiment has not been knocked by the recent bout of stock market volatility. Instead, it has continued to strengthen, as households begin to see the recently passed tax cuts show up in their pay cheques. We expect the Fed to raise rates a total of three or four times this year, beginning with a 0.25% rise in interest rates in March.

China’s January CPI inflation moderated to 1.5% year-on-year and PPI inflation decelerated further to 4.3% year-on-year. Exports growth inched up to 11.1% year-on-year in January, in line with consensus, and imports growth rebounded sharply to 36.9% year-on-year, partially on distortions of Chinese New Year holidays, significantly above consensus. China has recently proposed removing the two-term limit for the presidency, in a move that would pave the way for Xi Jinping to remain in office beyond 2023 and tighten his grip on power and the economy.\

Japan’s economy grew at a slower-than-expected 0.5% annual rate in the December 2017 quarter, as strong exports failed to fully compensate for relatively weak domestic demand. The preliminary data released in February showed that Japan has now managed eight straight quarters of growth, the longest expansion period since the financial bubble of the late 1980s. The unemployment rate is now at its lowest level since 1993, while January national core CPI (excluding fresh food) was +0.9% year-on-year, unchanged from December. Japan recorded a turn to trade deficit in January, of ¥943.4 bn, from a surplus in December. However, we note that this often occurs in January due to seasonality and this latest deficit was around 15% narrower than in January 2017.

Eurozone concerns over the continued weakness of the US dollar were laid bare in a recent set of European Central Bank minutes that highlighted fears that the Trump administration was deliberately trying to engage in currency wars. The account of the ECB’s January monetary policy meeting also revealed that its hawkish members pushed for a change in the bank’s communications, arguing economic conditions were now strong enough to drop a commitment to boost the quantitative easing programme in the event of a slowdown

In mid-February, the RBA reiterated its forecasts for a more positive growth outlook in Australia and a gradual pick-up in wages and inflation. Even so, key uncertainties remain with regards to the amount of spare capacity in the economy, the speed of recovery in wages and the outlook for household consumption. The RBA will almost certainly leave interest rates on hold at 1.5% at its policy meeting in March and it will probably continue to signal that there is no risk of a near-term rate hike. Indeed, as progress in raising inflation to the 2-3% inflation target is likely to be slow, rates will probably remain on hold throughout 2018 and the first half of 2019 too.

New Zealand
If global equity markets are fearing higher interest rates, as this month’s fall suggest, then Australia and New Zealand offer something of an oasis as both the RBA and the RBNZ have recently dropped some heavy hints that they are in no rush to raise interest rates. This does not mean Australian and New Zealand equity markets are immune to any further global weakness, but it may mean that their bond yields do not rise as far as elsewhere; as well, their currencies may weaken.

While the sudden increase in market volatility in February raises concerns, we do not believe that the bull market in equities has yet come to an end. The underlying fundamentals of the global economy remain very strong. The synchronised global growth currently underway is the best level of economic activity seen this century. Strong global growth is contributing to the strong upward revisions to forward revenues and earnings for companies around the world.

While core inflation is still contained in much of the world, the continued strength in the labour market in the US has heightened fears that wage inflation there is finally taking root. With the US Fed already on a tightening path and with three to four further rate hikes priced in this year, the market has become concerned about the impact of higher long-term rates on equity valuations.

Higher bond rates reflect a stronger global economy and are typical during the latter stages of an economic expansion. Historically, this is also a period when equity returns can be very strong.

A diversified approach to portfolio construction remains appropriate.


Information and Disclaimer:

Source: JMIS Limited, 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.

Investment Market Update – January 2018

Photo by G. Crescoli on Unsplash

Usually at this time of the year, financial market comments cover the performance of the year just finished and look forward to the likely prospects and outcomes for the coming year.

The Year to 31 December 2017
In an economic sense, this year will be remembered as the year that the US Federal Reserve raised its key policy interest rate three times in the year and promised three more increases in 2018, as well as starting to scale back its massive balance sheet nearly eight years after it started its quantitative easing programme.

In a political sense, it will be remembered as the year of Donald Trump and his policies, the tortuous Brexit negotiations in Europe, the New Zealand elections and the nuclear aspirations of North Korea.

It will also be remembered as a surprisingly strong year for most investment markets.

The performance from bond markets was modest in 2017 as US interest rates moved lower then higher during the year. The US 10-year treasury note yield bottomed at 1.36% in mid-2016. Its yield was 2.41% at year end after starting the year at 2.44%. At the beginning of the year, the official New Zealand cash rate (OCR) was sitting at 1.75% and the Reserve Bank of New Zealand (RBNZ) left it unchanged during the year, following three rate cuts by the RBNZ in March, August and November 2016.

The New Zealand markets had very satisfactory returns for these twelve months compared with Australia and the rest of the world.

Bonds (as measured by the S&P/NZX A Grade Corporate Bond Index) provided a total return (income plus capital gain) of 5.8%, while shares (the S&P/NZX50 Gross Index) provided a 22.0% annual return to equity investors. Listed property shares (the S&P/NZX All Real Estate Index) generated 13.9%.

Beyond New Zealand, sharemarkets were all positive. Australia had a strong year in AUD, 11.8%, and the results from other major bourses in their local currencies were similar, i.e. USA 19.4%, France 9.3% and Germany 12.5%. London, in the throes of its Brexit negotiations, provided a less impressive return of 7.6%.

Therefore, as a composite, the most rewarding sectors in 2017 were New Zealand shares and global shares. For the latter, the MSCI World Index (in NZD) rose by 17.8% in the twelve months.

The Year Ahead
In 2016, nearly all sharemarkets provided positive returns as dividend yields offered higher yields than bonds with the ultra-easy monetary policies and low interest rates around the world.

In 2017, this scenario was effectively repeated even though interest rates began to rise in the second half of the year.

In 2018, there is no sign yet that the synchronised upturn of the world economy is running out of steam even at a time when inflationary forces remain surprisingly low too.

The US Fed’s decision to begin scaling back its balance sheet nearly eight years after it started quantitative easing is a major milestone, but global financial conditions should still remain highly accommodative for a time yet. The latter are probably more influenced by central bank asset purchases throughout the world, which are likely to slow but remain positive at least for the next two years. Although the Fed and Bank of England raised policy rates in late 2017, short-term rates elsewhere will remain very low for the foreseeable future.

However, we are conscious that the bull market of over eight years has seen significant asset price appreciation in shares and that future investment returns are likely to be more modest. It is also clear that the bull market in bonds of the last 35
years is now over.

As statistics emerge around the prospect of higher economic growth, the need for higher interest rates appears to be gaining impetus but it will be a very gradual process.

Although the economic outlook is positive for 2018, we are fully aware that sharemarkets have risen sharply in recent years and valuations are high. Consequently, we will continue to monitor economic and political developments for any negative signals.

We still believe that the risk of an imminent bear market is not high at present. There are two main reasons for this.

  • First, inflation has played an important part in rising bear market risks in past cycles. Structural factors may be keeping inflation lower than in the past and central bank forward guidance is reducing interest rate volatility. Without monetary policy tightening, concerns about a looming recession – and therefore risks of a ‘cyclical’ bear market – are lower.
  • Second, financial imbalances and leverage in the banking system have been reduced post the financial crisis. This makes a ‘structural’ bear market less likely than in the past.

However, there are two portfolio catch-cries to heed to control risk within funds:

  1. Stay well diversified.
  2. Stay close to your benchmark sector targets, i.e. monitor your risk level.

Prudence suggests moderate caution towards markets in 2018.


Information and Disclaimer:

Source: JMIS Limited, 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.

Investment Update – September 2017

We are of the view that the nine-year equity bull market is not yet over with global stocks posting modest gains amid healthy corporate earnings reports and improving outlooks. The momentum of the world’s three main economies (US, China and Europe) is positive, with growth lifting all nations through accelerating trade volumes. This positive momentum is likely through to 2018, although the outlook is not without risk. At current company valuations, the US equity market is susceptible to the Fed starting to raise the policy interest rate. Additionally, political risk has been an increasing feature of the investment landscape in the last 12 months. Recently, the election-weakened UK government is facing imminent and difficult Brexit negotiations, US President Trump coming under sustained investigative pressure from Congressional committees, and deterioration in relations with nuclear renegade states such as North Korea and Iran, create an environment in which markets could prove more vulnerable to negative news shocks.


In late July, the Federal Reserve kept interest rates unchanged and said it expected to start winding down its massive holdings of bonds “relatively soon” in a sign of confidence in the US economy.

The Fed indicated the economy was growing moderately and job gains had been solid, but it noted that both overall inflation had declined and said it would “carefully monitor” price trends. Steady job creation in the economy has pushed the US unemployment rate to 4.3%, near a 16-year low.


The annual rate of Chinese GDP growth has been on a gradual upward trajectory over the past year, rising to 6.9% in the last quarter to June 2017. Tighter credit conditions imposed were expected to slow real estate investment. On the positive side retail sales and industrial production was up 11% and 7.6% respectively. This supports our contention over the last few years of extreme China angst that the authorities have the will and the means to support the economy when required.


Japan’s GDP second quarter figures showed that it has expanded for the sixth consecutive quarter, led by a strong rise in private consumption. This may be a positive for the Japan sharemarket but the BOJ pushed out any chance of rate rises for another 12 months (2019). This points to keeping monetary policy extremely accommodative for some time yet.


The region’s economy is expanding as year on year growth was up 2.1%, the highest level seen since 2011. Confidence indicators are positive and business sentiment is at levels not seen for a long time. Unemployment across the region is at a nine-year low of 9.1%, GDP growth is expected to be 2.1% for 2017 and inflation of 1.5%.

A lot of this positivity appears to be from a pickup in world trade. The Euro has been one of the best performing currencies over this period increasing against the USD and most of the main crosses.

It is expected that the ECB’s monetary policy will begin to ease, but this is not expected to start until 2018.


The outlook for Australia is moderate growth over the next one to two years, low inflation and an ‘on hold’ central bank, with the risks to growth still to the downside. The Australian economy managed to steer away from a negative GDP result in the March quarter thanks to a modest rise in consumer spending, higher business investment and a bounce back in inventories. Activity data in the second quarter has improved with retail sales spending and exports up, strong business conditions, but growth in 2017 is still likely to be about 2.0%.

Another positive is that the decline in resource sector spend will fade and momentum from other sectors outside of resources will support wage and employment growth in 2018.

The RBA left the cash rate unchanged at 1.50% in its August meeting with an indication they are in no hurry to move the cash rate from here, but the next move could be up.

New Zealand

The New Zealand economy has come through a relatively subdued six months. A series of one-off negatives impacting the final quarter of 2016 (dairy production) and the first quarter of 2017 (transport and construction) conspired to deliver below trend growth of 0.9% over the six months to March. Two consecutive quarters of low growth begs the question of where to from here? With financial conditions supportive, tourism booming and migration strong, we assume a modest rebound over the next few months to around the 0.7% per quarter we think underlying growth is running at. A key implication of the recent Monetary Policy Statement is that, if the economy struggles to reach this growth rate, the Official Cash Rate (OCR) may have to be cut further to deliver the demand pressures required to hit the RBNZ’s inflation target.


Earnings momentum is now positive for all major equity regions and we expect this to continue, supported by a solid economic backdrop. A normalising global economy should allow central banks to unwind their ultra-accommodative interest rate policies. We believe that long bond yields are set to rise further during 2017 and 2018.

Improving economic growth around the world will generally support equities and challenge bonds. That’s because this growth is more ‘traditional’ in nature, arising from better employment and demand, and thus allowing prices (and potentially profits) to rise.

For the remainder of 2017 we are not anticipating further significant upside in either Australasian or global share markets. Investors are aware of high valuations and may well move to protect the capital gains in their portfolios, rather than take on additional risk. An alternative scenario – market ‘euphoria’ in which investors simply become too complacent and push markets up into a climax marked by narrowing leadership and mounting volatility – remains a distinct risk, but it is still not our main case. This assessment could change if monetary policy normalization were to be interrupted and put on hold yet again, whether for economic or geopolitical reasons. Given the clarity with which the major central banks are now preparing markets ahead of policy moves and the robustness of the global expansion, any significant interruption seems unlikely.


Information and Disclaimer:  

Source: JMIS Limited, 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.

How terminal illness payments work.

I’m saddened to hear of Coxy (the T.V. Builder) sharing his story of terminal cancer.  Many of know the friendly and trustworthy face and now he must deal with the hand life has dealt him…terminal cancer.

You can watch his interview here

I don’t know any insurance details about him, but I thought it is a timely reminder to make sure that we have our insurances in order.

Coxy said “there were no warning signs” and I think we need to treat life insurance with urgency and priority, not something that’s an additional cost and we will get around to doing it soon because we’re too busy…take care of it now!

If your health changes, you will not get cover for your condition, and then it’s too late, when you need it you can’t get it, you need to get it BEFORE you need it.

Terminal Illness Payments

In most cases an insurance company will pay your insured amount of Life Insurance if you are diagnosed as being terminal.  The differences between insurers will be in how much you get paid, for example;

  • Some will pay the whole amount upon diagnoses
  • Some will pay 50% up front upon diagnoses
  • Some will pay if you are diagnosed that you only have 6 months to live
  • Some will pay if you are diagnosed that you only have 12 months to live

A Terminal illness is normally built into your Life Insurance cover and is not normally an additional addon, but in saying that, please check with us about your current policy or your insurer if we have not arranged your cover.

Trauma Cover Payments

Trauma cover is slightly difference because there is no terminal diagnosis required, all you need to do it meet one of the conditions and you are entitled to claim.  Payments are slightly different in that this is a different type of cover which you need to purchase additionally.

It does cover you for cancer and about 30 other conditions, but you do not have to be terminal to receive your insured amount.


Information and Disclaimer:  

This article is for information purposes only. It does not take into account your individual 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.

NZ Property Market – Outlook August 2017

2017 has been an interesting year in terms of residential property in New Zealand. Recent statistics suggest that there has been a definite easing in property values, particularly in Auckland but also throughout most of the country. There are a number of factors which are influencing the current trend – most of which are driving down demand. Lets take a look at some of these factors and then identify how this may play out over the next couple of years.

  1. RBNZ has kept interest rates at historic lows throughout this year and, in recent announcements has suggested this is likely to be the case for the foreseeable future – perhaps well into 2019.
  2. Despite the low RBNZ rates, international market influences (which is where most of our banks source their funds for lending purposes) are putting upward pressure on interest rates leading most of the banks to raise interest rates both fixed and floating. These rises in interest rates have had a dampening effect on demand for property as net returns for developers and investors are negatively impacted.
  3. The LVR restrictions and bright-line IRD test has also affected investor demand and created challenges for first-home buyers in particular who are trying to getting onto the housing ladder. Despite political comment that, with an easing in property inflation pressures, there is a possibility that LVR restrictions could be eased, there is no indication when this could happen.
  4. One of the more important counter-balances to price softening is the continued net migration inflows. There is no sign that this will change any time soon.
  5. Political uncertainty with the upcoming election, is also a dampening factor on demand with buyers (and sellers) taking a wait and see approach before moving.

So what is the outlook for property. As always, this requires some form of crystal ball-gazing and no-one really has the answer. However, it would seem likely that over the short to medium term at least, the double-digit growth we have seen in recent times is a thing of the past.  It’s worth remembering that investing in property should be a long term decision – over the short to medium-term buying a property becomes more speculative; not something we would recommend to any of our clients.

If you’d like to understand what all this means for you – get in touch and we can discuss your situation and needs.


Information and Disclaimer:  

This article is for information purposes only. It does not take into account your individual 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.