IMPORTANT, PLEASE READ: This material is provided for information only. It is not personal financial advice. No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, you should, before acting on the advice, consider the appropriateness of the advice, having regard to your investment objectives, financial situation and needs. If you need to speak with an adviser, please contact Miles on 021 645 000 or miles@moneyplanners.co.nz.
I’ve fielded a number of calls in recent weeks from clients who are concerned about the current market turmoil. There’s no doubt that 2022 from an investment perspective has not gone well – with double-digit negative returns since the start of the year. With an almost incessant barrage of negative economic news and increasing geopolitical turmoil and unrest, its hard to see any positives on the horizon. The thing is – the markets have reacted accordingly and the downturn reflects the market’s assessment of the current outlook. Does that mean that it will get better from hear on in? No – but, neither does it mean it will get worse – the markets will do what the the markets do – respond to price signals.
What does that mean for your KiwiSaver or other investments? Should you make any changes?
Our advice is always to consider the goals you have for your KiwiSaver/Investment and ask yourself two questions –
have the goals for your KiwiSaver or Investment changed since the beginning of the year? and,
Have your time horizons changed?
If the answer to either of these questions is “Yes” (or “possibly) – please get in touch so we can help you determine whether any changes are appropriate. If you answered No to both questions – then sit tight – it could be a bit of a bumpy ride but by focussing on the long term (signal) as opposed to current market turmoil (noise), you will be able to take advantage of the recovery when it comes around.
Further Reading
The worst years ever in the stock market – insights on stock market downturns over the last 100+ years from one of our favorite investment bloggers, Ben Carlson
The best investment strategy for this market – this article also by Ben Carlson, contains a fascinating graph showing the value of dollar cost averaging – particularly in a bear market!!
Things that matter – a sketch to remind us where we need to focus our attention
Current reality – another sketch from the investment sketch master, Carl Richards.
The conflict in Ukraine has added to the increased level of uncertainty prevailing in financial markets this year, which were already grappling with concerns over high inflation and the expectation of higher interest rates. However, until yesterday it was unknown whether an all out war would occur. Consequently when it was announced that Russia had invaded Ukraine, share markets fell sharply and commodity prices including oil rose. Even the New Zealand market was impacted with the S&P NZX50 index falling 3.3% and the Australian share market falling 2.2%.
A fall in share values has been the markets’ historical response to the threat of war. Yet perversely once the campaign has started, the focus of markets moves on to other issues and share markets have typically rebounded. This theme occurred last night when the S&P 500 was initially down 2.6% only to end the day up 1.5%.
Clearly there will be some longer lasting economic and political impacts of the conflict. The extent of the economic sanctions and the removal of financial linkages with Russia are designed to punish Russian aggression and will likely draw a commensurate response from Russia. The imposition of sanctions will likely persist over the long-term. However, the economic impact is likely to be more punitive on Russia than on western economies.
From a New Zealand perspective, the extent of trade with both Russia and Ukraine is limited. Russian exports to New Zealand during 2020 were approximately US$252 million, overwhelmingly mineral fuels and oil. New Zealand exports to Russia consist primarily of dairy products and are of a similar order of magnitude in terms of value. Trade with Ukraine is insignificant.
Wider implications might be drawn in terms of the price of globally traded commodities most notably oil. The oil price has already surged with Brent crude trading at over US$100 per barrel. Given Germany’s dependency on Russian natural gas, continued elevated electricity prices are likely in Europe. However, natural gas is not yet an internationally traded commodity so this impact should be limited to just Europe.
A rise in the price of energy is a two-edge sword from a monetary policy setting perspective. While it feeds through into a higher inflation rate, it also depresses discretionary spending. This means that central banks may not have to increase interest rates as rapidly or as high given the increased cost of oil will reduce demand for other goods and services.
Other commodities that could be impacted include grain – Ukraine is the bread basket of Europe – aluminium and nickel. Russian based Rusal is one of the largest global aluminium producers, while Norilsk Nickel is the world’s largest Nickel miner. The conflict may therefore have second round effects and some unexpected consequences.
Importantly, there are many companies that will not be impacted by the conflict. Exactly why both the New Zealand and Australian share markets should fall so sharply is perplexing. The impact on both economies is likely to be limited with the direction of interest rates and the return to normality post COVID much more important. Similarly, the United States, the largest global share market, will only be marginally impacted. Again, the direction of inflation and interest rates will be more important in the long term to this market.
In summary, outside the significant human cost and the possibility for further increases in the price of petrol, the impact on the global economy is likely to be minimal. This implies the long-term impact on client’s portfolios is also likely to be minor. Share markets experienced a similar fall in 2014 when there was unrest in the Ukraine and Russia annexed Crimea. Yet after the initial decline, share markets rebounded and largely forgot about the ongoing conflict. Therefore, we believe the prudent course of action is to look through any immediate tendency to over react and focus on core investment drivers such as what is happening to inflation and interest rates and how are companies reacting to the economic environment.
– Source: Select Wealth Management
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.
Interest rates fell over the month of September and for the first time in New Zealand some market rates went negative. Into the tail end of the month government bonds with maturities out to 5 years were providing negative yields. This implies that a purchaser of these bonds, if they held them to maturity, would receive a negative return on their investment. The negative yields are a direct result of monetary policy in New Zealand and signal the expected direction and level of interest rates under the current policy settings. The RBNZ has advised financial institutions to prepare for the possibility of a negative Official Cash Rate (OCR) in terms of their systems. This is important as the OCR has an influence over the short- term interest rates retail investors receive from banks. The RBNZ has also continued to aggressively buy bonds issued to the market reducing the level of interest rates generally. Messaging from the RBNZ and Minister of Finance has been that interest rates will remain low, and potentially negative in some instances, for as long as required to lift the New Zealand economy back to full employment and a ‘healthy’ inflation rate. This suggests that the time period over which interest rates are at near zero levels will persist potentially for a number of years.
Term
deposit rates have followed bond rates down. Bank term deposit rates are now
below 2% on all terms out to 5 years. Despite the low current rates there is
still some potential for interest rates to decline further given central
government objectives and it is conceivable that term deposit and bond yields
will follow.
The
decline in interest rates has been prolonged and this has impacted on the
income available from fixed interest investments. As interest rates continue to
fall into 2021 clients who require a regular income from their investment
portfolio, and have an allocation to fixed interest, will find the return from
this asset class will be near zero. These low interest rates may continue over
the next few years, requiring those investors to re-evaluate their objectives
and expectations. Allocating more investments to shares can increase the income
as well as the return for investors over the long-term, but this will come with
additional risk of the capital value of their portfolio rising and falling.
Portfolio Impact of Low Interest Rates on Debt Securities
Interest rates approaching zero, and potentially below, will result in the potential for capital gain but this is not on an open-ended basis. If eventually the current trend reverses and rates begin to rise in the future, then there is potential for capital losses to be incurred and given the low level of rates the magnitude of losses is amplified. An investor is faced with an investment class that after tax may generate an income for investors of close to zero but if interest rates rise, which may be some years away, a potential capital loss. We expect that in 2021 the risk and reward equation of investing and receiving nothing with the potential for a capital loss will test many investors’ patience. As an example of what an investor could expect from fixed interest is the recent new issue by Mercury Energy of a 7-year bond at 1.56% p.a.
Portfolio Impact of Low Interest Rates on Shares
The fundamental driver of share values is cash flow generation into the future, discounted to obtain a present value. Lower interest rates decrease the discount rate and increase
the
theoretical value of the shares. Likewise, the relative attractiveness of
dividends to investors improves as interest rates fall and provides a further
driver to capital growth in share values. In this scenario both growth
companies and yield companies are beneficiaries of the underlying monetary
conditions.
In the
short-term the translation of these market drivers is not always evident as
other factors influence the direction and magnitude of price changes in specific
securities. In the last month the S&P/NZX Gross index fell 1.6%. In
contrast the S&P/NZX All Real Estate Gross index rose by 2.6%. The broader
market index weakened as the previous market leaders A2 Milk and Fisher &
Paykel Healthcare share prices fell over the month 17.5% and 9.7%
respectively. These two companies are
growth businesses with no and minimal distribution yield respectively. With the
knowledge that low interest rates may be something we will need to live with
for some time, property emerged from a period of underperformance as yields
from property companies once again became compelling with an income return to
investors of approximately 5% p.a.
Global
share markets also lost traction in local and New Zealand dollar terms. The US
market as measured by the S&P 500 lost the most ground. High flying stocks
such as Amazon slipped (-8.9%) and investment flowed to value companies e.g.
building materials (Martin Marietta +9%) and traditional delivery company FedEX
(+15%). Initial public offerings of technology companies continued to be well
received e.g. Snowflake and Unit Software listing at large premiums to issue
prices.
Conclusion
The current interest rate settings are confronting conservative investors with a stark choice. If investors place greater weight on capital preservation, then the status quo in terms of asset allocation continues but this will be at a cost of minimal income. In order to generate some income from portfolios investors will need to consider increasing the risk within fixed income assets or move from fixed interest to other ‘stable’ assets that generate reliable cash flows, such as selected forms of property and infrastructure companies. Investing in these assets is not without hazard and is always subject to the characteristics of quality and price. There is a popular saying ‘TINA’. (There Is No Alternative). It looks like we might be in a low interest environment for some years and the hunt for income will put pressure on assets that offer an investor an income.
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.
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…..it’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 investments..you’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.
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.
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
For residential investment property, I have used the New Zealand housing price index for the last 25 years. ..link here.
For an alternative, I have used a highly regarded balanced growth fund from one of New Zealand’s leading superannuation schemes.
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.
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
$1.565
$1.586
$3.394
$4.951
Fund Value 31st March 2018
$1.508
$1.991
$2.790
$4.297
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.
IMPORTANT PLEASE READ:
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.
