by Miles Flower | Feb 4, 2018 | Investment News
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.
Summary
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:
- Stay well diversified.
- Stay close to your benchmark sector targets, i.e. monitor your risk level.
Prudence suggests moderate caution towards markets in 2018.
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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.
by Miles Flower | Sep 20, 2017 | Investment News
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.
US
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.
China
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
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.
Europe
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.
Australia
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.
Summary
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.
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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.
by Miles Flower | Aug 21, 2017 | Uncategorised
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.
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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.
by Miles Flower | Aug 21, 2017 | Uncategorised
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.
- 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.
- 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.
- 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.
- 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.
- 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.
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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.
by Miles Flower | Jul 14, 2017 | Uncategorised
When it comes to financial planning and assessing how much someone should be insured for, the answer is subjective and depends on what your current and future financial commitments are as well as your priorities and budget.
During this risk assessment process, it is common to hear that you should be insured for millions, especially if you want to leave your surviving spouse and dependents the household income you were generating. However, managing a large lump sum of cash can be a challenge for some people. Life Income Cover is a great solution and can form a very important part of your family’s financial future.
LIFE INCOME COVER
In the case where you may need to insure for millions, Life Income Cover benefit can remove a lot of the financial risk which comes from receiving such a large amount of cash.
For example, if you needed to insure for $2M and then at the time of your death the insured amount of $2M is paid to your spouse. Your spouse has now become a millionaire and is now at risk of making poor financial decisions, which could lead to the partial or even complete loss of such a large amount of money.
THE FINANCIAL RISK
In times of grief and loss, the surviving spouse (male or female) is not normally in a state of mind to manage such a large amount, and possibly even after such a recovery period, they may not have the skills to manage such a large amount of money.
Well-meaning friends suggest property, or shares, or talk to their investment adviser and so on.
I am not saying that any of these are wrong, what I am saying is that there are risks, and they should be managed.
REMOVING SOME OF THE RISK
This is where Life Income Cover can remove or substantially reduce financial risk. Let’s say for example, you did need $2M of cover. What you could do is insure for $1M and have $100,000 per year paid as an income over 10 years.
This way your family are not exposed to losing all of the money through mismanagement or poor investment choices.
Part of your initial assessment for $2M may have been a requirement to leave an income for your family for 10 years, so instead of getting all the money up front, you can have it paid out over a set period and therefore gets used as intended.
CHOICES
Life Income Cover provides more choices when it comes to managing the financial risk to your family. When used properly and alongside other types of cover, it can be a suitable option if you want to leave your family income for a set period such as 5 years, 10 years etc.
Life Income cover is not based on your actual income or occupation. It is a simple product where you choose the income you want to leave your family each year and how long you would like this income paid to them.
If you have any questions about Life Income Cover and would like to discuss how this would work for you, please contact us anytime.
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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.
