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.
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
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
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
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.
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
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.
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
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.
While short-term risks in global markets feel higher, longer-term there are good reasons to be somewhat more confident.
The recent sharp falls in Chinese shares arguably tells us more about regulatory issues and fears around the share market and currency in China rather than much about the economy.
A U.S. recession is unlikely; the combination of good US and euro zone indicators lately indicate the global economy is unlikely to plunge into recession. Lower oil prices and commodity prices are providing a boost to consumers and many businesses. Monetary policy remains ultra-easy.
Short sharp falls in early 2016 have seen share market valuations become a little more attractive. Apart from the US, central banks look likely to continue to support markets with easy monetary policies through the first part of 2016. Inflation is virtually non-existent, so interest rates need not rise in the short term. This scenario still supports a constructive case for buying selected equities, at least until interest rates begin to rise to make bonds more attractive. In fact, in the first three weeks of March, markets have been much more positive. This is a welcome development.
However, a diversified approach to investment, as always, remains appropriate. Moreover, as all share markets have risen strongly over the last few years, we encourage investors to reflect upon their portfolios which may have drifted away from their benchmark ratios due to the exceptionally strong share returns of recent years.
If you have any questions or concerns about what is happening in the market please get in touch with us.
Every year in the heady celebration that is New Years’ eve we all make resolutions for the coming year but surveys in the past show that 75% of us stick to our resolutions for a week and only 46% of these are still on target 6 months later.
Whether it be to lose weight, run a marathon or spend less on shoes we are all striving to improve our lives but quickly lose interest and the New Years’ resolution becomes a distant memory.
Planning our financial future often gets put on the back burner because we are all so busy and fear that if we have a financial plan we won’t be able to enjoy the lifestyle we currently enjoy, when in fact a financial plan creates the opposite effect.
Financial planning allows for the lifestyle you enjoy and plans for the future lifestyle that you desire, creating one less thing to worry about in our busy lives.
We would like to suggest that you make a resolution this year that we at Money planners can assist you to stick to, by resolving to get your finances, retirement and estate planning in order.