Life Income Cover – what is it and why you may want to think about it.

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.

Investment Update – November 2016

investment-update-november

After a two-year slowdown, the global economy’s growth rate is starting to lift again. Commentators expect global GDP to rise to 2.8% in 2017, after 2.4% growth this year.

Global growth has fluctuated in a narrow range for the past five years and this recent acceleration marks a shift from the bottom to the top of that range.  This movement should be relatively supportive for risk assets.  The strengthening is largely due to the terms of trade shock from the strong US dollar and the fall in commodity prices on several economies and sectors starting to abate in the latest numbers.

US

The September decision of the US Federal Reserve Committee to hold interest rates unchanged was a “close call”: some policymakers thought a move could be merited relatively soon. On the other hand, others preferred to wait for more convincing evidence that inflation was moving toward the Committee’s 2% objective.

After the decision, Janet Yellen, the Fed chair, stressed that there was scope for further improvement in the labour market before the central bank needed to lift rates since its December 2015 increase. Jobs numbers released after that meeting have supported that argument, as the unemployment rate inched up amid signs Americans are being drawn off the side lines and into the labour force.

Non-farm payrolls for September rose by 156,000 new jobs, which was slightly below market expectations, while the unemployment rate lifted from 4.9% to 5%.  September retail sales were slightly soft at only +0.6% too.

Japan

The Japanese parliament passed an extra spending package in mid-October to help to get Prime Minister  Shinzo Abe’s economic-revival plan back on track, but the Japanese leader is already facing calls to do even more than this, as he is fully committed to a reflationary strategy for the country.  Some economists say the Bank of Japan is essentially offering unlimited funds to the government interest-free and he should not let this opportunity pass.

China

Mining shares have risen in recent weeks as Chinese factory data adds to signs of an improving economy for the largest consumer of raw materials.   Reports from China show a gauge of manufacturing held near a two-year high for a second month in September, and services increased too.

However, Goldman Sachs Group Inc. has sounded a warning about the outlook for China’s property market, saying it sees growing risks across the industry and that any downturn will pose a challenge for metals, especially iron ore and steel.  They cited factors such as possible overbuilding, concern some people now cannot afford homes and rising speculation to support their view.

September CPI inflation in China was above expectations at +1.9% pa.

Europe

In recent months, the European Central Bank has been caught on the horns of a dilemma — between a lacklustre economic recovery it fears cannot stand on its own two feet and German hostility to any attempt to extend the ECB’s ultra-loose monetary policy. Up to now, the ECB has been able to sidestep the controversy. Britain’s decision to leave the EU has caused less fallout in the Eurozone economy than some had feared, relieving the central bank of the need to carry out any emergency measures.

The call for governments to increase spending in support of monetary policy is growing louder in Europe as well as Japan.  Increased fiscal spending would stimulate these economies and bond yields would likely move higher in anticipation of higher inflation.

Australia

The economy grew by 0.5% in the third quarter with year-on-year growth picking up to a respectable 3.3% from 3.0%.  However, without a strong contribution from government spending growth, GDP would have been negative in the quarter.  Domestic demand remains quite sluggish.

Housing remains the key for the interest rate outlook.  For now, the RBA seems happy with the apparent stability in the housing market: auction clearance rates remain around the 80% mark.

New Zealand

GDP data released for the June quarter showed growth momentum continuing to build further above its long-run trend. In particular, the pace of activity increased to a robust 3.6% year-on-year in June, strengthening from the 3.0% year-on-year growth rate recorded in the March quarter. Relative to most other developed market economies, the NZ growth rate continues to remain favourable. Moreover, recently released leading activity indicators suggest that the annual rate of GDP growth is likely to continue to remain in a 3.0-3.5% range over the second half of 2016.

Underpinning this positive growth performance has been activity concentrated in the construction and services sectors, which have also benefited from strong tourism growth. In addition, net immigration which posted a historic high over August has also been an important contributor to the strengthening in domestic demand. House price inflation continues to remain robust, although there are initial signs that the RBNZ’s recently introduced macro-prudential measures and some tightening in credit conditions may be having a dampening effect.

September CPI inflation was in line with expectations at 0.2% for the quarter and the year. These figures take the economy dangerously close to deflation, a phenomenon where falling price expectations start to suppress economic growth.

Summary

Overall, we find that markets are still pricing in a world of low growth, low interest rates and low inflation without any visible road blocks to “more of the same” in markets.   Even after the strong rise in equity values over the last 7 years and a correction in October, we are cautious but not bearish on equities as there is no sign of recession and financial authorities appear prepared to do whatever is required to ensure that the financial markets are well supported.

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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.

Investment Update – October 2016

After several benign months, some volatility returned to investment markets in September to coincide with renewed talk of a pending Fed rate rise in the US, a lack of any new quantitative easing in Europe and fluctuating long bond rates.

US

In late September, the US left its official interest rates unchanged.  Janet Yellen said the case for an increase in short-term interest rates had strengthened recently amid firm jobs growth, signalling a move is becoming more likely in the coming months and, potentially, soon after the US election.    The Federal Reserve chair highlighted solid consumer spending and a string of payroll gains as she predicted moderate growth in the US economy as well as a return of inflation in the next few years.

US consumer spending, contributing about two-thirds of the US economy, rose +0.3% for a fourth straight month in July, bolstered by stronger income gains (+0.4%) and with strong demand for autos and raising the possibility of a Fed rate rise in 2016.   However, the August US employment report was softer than expected, with a 151,000 gain in non-farm payrolls falling short of the 180,000 median consensus forecast. The jobless rate was unchanged at 4.9%.

Japan

In late September, the BOJ held official interest rates steady but said that it would expand its monetary base further by keeping 10-year bond yields around zero.  It has vowed to keep easing monetary policy until inflation reaches 2%. Mr Kuroda, governor of the Bank of Japan since 2013, claimed the central bank’s policies “have contributed significantly to the positive turn-round in Japan’s economy” and said there was no chance of reducing the level of monetary accommodation.

His remarks pave the way for further easing even including the possibility of cutting interest rates from the current minus 0.1%.  However, both growth and inflation still remain elusive.

China

The recent G-20 summit of major economies meant to be a moment of glory for China coincided with a world-wide backlash against globalization—and much of it is blamed on China.  As China’s growth slows and economies in the U.S. and Europe remain in the doldrums, complaints have gathered pace in recent months as China’s industrial overcapacity has dampened prices abroad.  The problem is that access for foreign investors has not matched the terms Chinese encounter overseas, while Western officials and businesses see the bidders in ever-larger Chinese acquisitions of major global brands as state-controlled beneficiaries of protected markets.

China’s official NBS manufacturing PMI improved to 50.4 from 49.9. This was above the market consensus of 49.8 and is the highest reading since November 2014. As such, it is probably an upside surprise for policy makers as well.

Europe

In early September, after official figures showed an easing in underlying inflation figures, the European Central Bank  disappointed markets and left interest rates in the Eurozone unchanged, but kept the door open for more cuts in the months ahead.  Meanwhile, it renewed calls to politicians to do more to support the bloc’s languid economic recovery

Australia

In Australia, second quarter GDP growth rose +0.5%, and therefore +3.3% on an annualised basis: the latter represents the fastest growth rate in 4 years. Growth is being driven by strong domestic demand and increased government spending. This also represents the 100th consecutive quarter without a recession for the country.

New Zealand

In New Zealand, second quarter GDP growth rose +0.9%, and therefore +3.6% on an annualised basis, to out-perform Australia.

Activity data released over August has continued to suggest that momentum in the NZ economy remains robust, supported by strong inward migration, construction and tourism activity, together with accommodative monetary policy settings. In particular, retail sales growth over the June quarter showed a robust increase of 2.3% quarter-on-quarter.

Nevertheless, despite this backdrop of above trend growth, inflation pressures continue to remain muted, with inflation expectations data continuing to track around historic lows.

Such an outturn will likely further compound the difficulties the RBNZ currently faces in setting appropriate monetary policy conditions.

In particular, the RBNZ needs to balance the risks of further exacerbating imbalances in the economy – such as excessive house price inflation – through a more aggressive easing profile, against the risk of not easing policy sufficiently and prompting a further and more enduring undershoot of their mandated 2% inflation target.  A high exchange rate continues to be a problem.

The RBNZ has said that “further policy easing will be required to ensure that future inflation settles near the middle of the target range”.  However, in late September the RBNZ left the rate unchanged at 2%.

Summary

Overall, we find that markets are still pricing in a world of low growth, low interest rates and low inflation without any visible road blocks to “more of the same” in markets.   The end of quantitative easing is not apparent yet.

Even after the strong rise in equity values over the last 8 years, we are cautious but not bearish on equities as there is no sign of recession and financial authorities appear prepared to do whatever is required to ensure that the financial markets are well supported.

Politics are becoming increasingly important to investment outlook.  Sentiment seems to be moving away from policies that assist assets owned by the wealthy – real estate and shares – towards a greater focus on support for the average person in the electorate.  Fiscal stimulus may be coming.

A diversified and balanced approach to investment remains appropriate.

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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.

Investment Update – September 2016

After a weak first half of 2016, global GDP growth should recover modestly in the second half as the large drag from inventories abates. However, the world continues to face substantial headwinds, including the impact of Brexit, continued weakness in US investment ahead of their election, a moderation in Chinese growth and the impact of the stronger yen on Japan.

US

In August, the Fed left interest rates unchanged as good news about the economy, such as the better employment data, was offset by subdued inflation and global worries.  However, the Fed kept open the possibility of a rate rise later this year, saying the near term risks had now diminished. Another positive was that unemployment in July was unchanged at 4.9%.

In July, the CPI was slightly weaker than expected with a core rate of 0.1% versus 0.2% expected, new home sales rose more than expected to the highest level in 9 years and the manufacturing PMI slipped from 52.9 to 52.1 but remained in expansion mode, as it has been since 2009.

Japan

In early August, Japan’s cabinet approved a government stimulus package that includes ¥7.5 trillion (US$73 billion) in new spending, in the latest effort by Prime Minister Shinzo Abe to jump-start the nation’s sluggish economy.  The spending program, which has a total value of ¥28 trillion over several years, represents not just an attempt to breathe new life into the Japanese economy but a political test for Mr. Abe, who has struggled to deliver sustained growth.

Japan’s August preliminary Manufacturing PMI rose to 49.6 from 49.3, but stayed in contraction mode for the 6th straight month.

China

In July, China’s macro statistics for industrial production, fixed asset investment and retail sales growth as well as new credit data all weakened.

This data seemed to suggest that the overall growth momentum of the first half of the year is wobbling a little lower in China. The yuan has continued to weaken slowly, as capital outflows persist.

Europe

The Eurozone’s slow economic recovery appears to have weathered the initial shock of Britain’s vote to leave the EU with the July PMI surveys of business activity reaching their highest level in seven months.

The European Central Bank has hinted at taking further action next month should economic conditions in the eurozone fail to improve, with its top policymakers saying the impact of the latest wave of uncertainty to hit the global economy needed “very close monitoring”.  The latest edition of the central bank’s monetary policy deliberations — for the meeting on July 21 when it decided to keep rates on hold — indicated the governing council may well act to keep its ultra-loose monetary policy in place for longer when it next meets on September 8.  Europe’s recovery has remained on track, but aftershocks from the UK vote to leave the EU and the poor health of the region’s banks risked its derailment.

The Bank of England cut its benchmark interest rate to 0.25% in July, the lowest level in the Bank’s 322 years, and introduced a series of bond-buying measures to support the economy after Brexit. The rate had been at 0.5% since March 2009.

Australia

In early August, the Reserve Bank of Australia cut its official cash rate by 25 basis points to 1.5% citing low inflation.   Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, low interest rates will likely remain for some time.

New Zealand

As expected, in mid-August, the Reserve Bank of New Zealand (RBNZ) cut the official cash rate by 25 basis points to 2%. This was the 6th cut in the last 14 months.  At the time, the RBNZ said:

Global growth is below trend despite being supported by unprecedented levels of monetary stimulus.  Significant surplus capacity remains across many economies and, along with low commodity prices, is suppressing global inflation.  Some central banks have eased policy further since the June Monetary Policy Statement and long-term interest rates are at record lows.  The prospects for global growth and commodity prices remain uncertain.  Political risks are also heightened.

Weak global conditions and low interest rates relative to New Zealand are placing upward pressure on the New Zealand dollar exchange rate.  The trade-weighted exchange rate is significantly higher than assumed in the June Statement.  The high exchange rate is adding further pressure to the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradables sector.  This makes it difficult for the Bank to meet its inflation objective.  A decline in the exchange rate is needed. 

Domestic growth is expected to remain supported by strong inward migration, construction activity, tourism, and accommodative monetary policy.  However, low dairy prices are depressing incomes in the dairy sector and reducing farm spending and investment.  High net immigration is supporting strong growth in labour supply and limiting wage pressure.

House price inflation remains excessive and has become more broad-based across the regions, adding to concerns about financial stability.  The Bank is consulting on stronger macro-prudential measures that should help to mitigate financial system risks arising from the rapid escalation in house prices.

Headline inflation is being held below the target band by continuing negative tradables inflation.  Annual CPI inflation is expected to weaken in the September quarter, reflecting lower fuel prices and cuts in ACC levies.  Annual inflation is expected to rise from the December quarter, reflecting the policy stimulus to date, the strength of the domestic economy, reduced drag from tradables inflation, and rising non-tradables inflation.  Although long-term inflation expectations are well-anchored at 2 percent, the sustained weakness in headline inflation risks further declines in inflation expectations.

Monetary policy will continue to be accommodative.  Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range.

Summary

We continue to expect a capital markets back-drop of low economic growth, low inflation and very low interest rates.  We also expect the “high-yield “bond and share markets like New Zealand and Australia to be well supported by capital flows from the ultra-loose monetary policy countries.

In New Zealand, this buying has the tendency to inflate the value of a handful of higher capitalisation stocks whereas, below these, there are numerous shares trading on more realistic PE multiples.

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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.

Brexit: What it means for your investments or Kiwisaver funds

With the potential of Britain leaving the Eurozone, there has been and will continue to be volatility in the markets and currencies.

The most important issue, when an event of this magnitude has occurred, is to ensure that one avoids the gravitational pull of short term emotion and decisions are made based on what is going to happen and not what has recently happened.

Moneyplanners investment funds or KiwiSaver clients are in highly diversified portfolios and the decision to leave the EU will have a short term impact on the UK, European and global economies. The magnitude will be difficult to decipher and will only be known in hindsight. Longer term, it could be positive or negative. The obvious is well known, with both the possibility that this leads to the unwinding of both the UK and EU, or it may finally galvanise to EU into a complete and proper union which ultimately would be positive. One should also note, that the depreciation of the pound will be a positive stimulus to their economic position at some point and that banks balance sheets are significantly stronger and more liquid than at any point in recent history.

Co-incidentally, last Thursday the US Federal Reserve released the results of their latest bank stress tests, from which we note* that the “US banking system has the financial strength to withstand an economic meltdown — and negative US interest rates — that cause losses of $385bn”, regulators said on Thursday [June 23]. Each of the 33 banks tested survived the toughest scenario designed by the US Federal Reserve. Under the simulation, which lasts for nine quarters, stock prices drop about 50 per cent, unemployment reaches 10 per cent, and gross domestic product declines sharply. For the first time the Federal Reserve also tested how bank balance sheets would cope with negative interest rates.

Markets also often over react to the most recent event and thus there may be opportunities. The respective Investment managers  in Moneyplanners client portfolios will be looking to maximize any opportunity they identify over the coming  months.

So the best strategy is to hold your investments for the medium to long term and let the markets settle back down.

If you have any specific questions regarding your investment funds or KiwiSaver, please give me a call.

Miles Flower

Property markets – its about the long run

Property prices continue to rise in Auckland despite increasing concerns about affordability. There are many factors at play and, in combination, they are creating what some are describing as an overheated market. However, when it comes to any form of investment you need to take the long view….

Latest property values are lifting according to QV.co.nz and the indications are the Auckland market is back into a positive vein. Not only is Auckland heating up but the whole New Zealand market is lifting.

While Money planners takes a long term view in the property market with an average net growth of 4.5% it is interesting to note that in the last 12 months the QV statistics show the New Zealand market has risen by 12.4%.

When investing in property it is essential to take a long-term view and Moneyplanners Ltd recommend that your windows for holding a property should be a minimum of seven years ideally at least 10 years so you experience not only the highs but the lows that can happen when investing in property and as a long-term gain.

Clients are asking have they left it too late to invest in the property market my response is no.

While the best time to buy property is always now if you can afford it, most clients do not need to realise short-term gains in their investment property for retirement planning. Their gains in property are required in the long term if you are looking at retirement planning and can be a minimum of 10 years up to 20 years plus in retirement. So if you can afford to buy an investment property without undue strain on your personal finances now is the time to do it.

My favorite location for investment property ranges from Wellsford to Hamilton, but possibly we should look to add Tauranga to that mix especially for those that find the $700,000 to $800,000 figure to purchase in the Auckland area too high for them to support without affecting their personal lifestyles.

The QV figures show Tauranga has grown 12.6% over the last 12 months with an average market value of $592,000 and indications are that this growth has come from non-Auckland investors.

Another market worth considering is Whangarei where rental properties are proving hard to find and demand is strong. In the long term Auckland may need to look to move its deep water port and the obvious answer is for development of Marsden Point which will create a demand for rental properties.

Please get in touch if you’d like more information or would like to discuss your own personal investment planning needs.

Cheers, Miles