Jenée Tibshraeny talks to fund managers about where they see markets going following a year dominated by interest rate cuts

Jenée Tibshraeny talks to fund managers about where they see markets going following a year dominated by interest rate cuts

January - it’s a good time for swims, BBQs and (sorry to ruin the fun) financial health check-ups.

While borrowers and investors in share markets have had reason to pop Champagne over the festive season, savers have had to opt for the cheap bubbly.

Last year saw central banks around the world, including the Reserve Bank of New Zealand (RBNZ), cut interest rates to encourage people to borrow and spend to stimulate the economy and boost inflation.

This saw the otherwise slowing New Zealand housing market reignited, and investors, being offered peanuts for putting their money in term deposits, chase yields in commercial property and shares.

Looking to 2020, the fund managers spoke to predict we’re in for a smoother ride.

Jitters over Brexit and the US/China trade war have to some extent been allayed. Locally the Coalition Government isn’t changing the tax system and banks aren’t being made to hold as much additional capital as initially proposed.

Uncertainty still exists. Australia is on fire, there are tensions in the Middle East, a number of trade agreements need to be negotiated, Donald Trump’s still on Twitter, and economic growth isn’t amazing around the world.

Accordingly, monetary policy will almost certainly remain expansionary. The RBNZ is expected to cut the Official Cash Rate (OCR) one more time by 25 basis points, if not keep it where it is at a record-low 1%.  

Borrowing will continue to be cheap, pushing people towards the property market. Meanwhile returns from shares are expected to keep looking relatively attractive.

However, without sugar hits from the Federal Reserve changing tack and cutting interest rates, and the RBNZ cutting the OCR by twice as much as expected in one go, share values aren’t expected to increase as much as they did in 2019.

Focus to shift to companies’ earnings

Pie Funds’ chief investment officer, Mark Devcich, maintains companies will have to deliver strong earnings to justify higher share valuations. If they don’t, prices will fall.

In other words, while equity market growth was largely driven by interest rate cuts in 2019, he sees investors looking more towards earnings growth in 2020.

Devcich says provided there are no signs of recession, particularly in the US, equity markets are an attractive place to invest.

Bull markets don’t die of old age

But isn’t it a bad idea investing in potentially over-valued stocks?

Not if the only alternatives are investing in bonds or cash, which are widely expected to continue being low-yielding while interest rates remain low, Devcich says.

Milford Asset Management portfolio manager, Mark Riggall, agrees, saying high share valuations aren’t a hurdle at the moment.

Summer KiwiSaver’s investment committee chair, Martin Hawes, says bull markets don’t die because they’re old. They die because of a specific event.

The equity market won’t crash solely because it’s been growing for several years now.

Bulls and bears in balance

While the contents of this article shouldn’t be considered financial advice, the general rule is that an investor should identify their risk appetite and stick to the corresponding type of asset allocation through the good times and bad.

So if you’d like to cash in on your investment in the next few years, you should invest conservatively by having more cash and bonds in your portfolio than equities for example.

Whereas, if you have several years to recoup any losses, you can afford to invest proportionately more in high-risk, high-reward shares, and less in bonds and cash.

While fund managers will deviate slightly from target asset allocations depending on market conditions, Hawes maintains the market is currently well balanced so there’s no real need for this.

Share prices are pretty high, so he wouldn’t suggest investors rush out to buy more shares than they had otherwise planned. Conversely, there’s no financial incentive to put more money in the bank than an investor’s target asset allocation suggests.

NZ vs overseas

Looking at equity markets, there are of course a number of approaches one can take to investing within this asset class.

Providers of low-cost index trackers will tell investors that in the long-run the market always beats people trying to pick stocks.

However, active managers say they can soften blows during downturns and enhance gains during upswings.

As someone who picks stocks, Hawes prefers being weighted towards New Zealand shares versus overseas ones, because he has good networks here, making him better equipped to beat the market.

It can be difficult for a fund manager sitting in Wellington to beat a fund manager sitting in New York when it comes to investing in US companies.

In saying so, Hawes is concerned that because most of the New Zealand market is owned by overseas investors, the NZX will be hit hard in the event of a downturn. Sure, there are KiwiSaver funds invested locally, but if overseas investors retreat, we’ll certainly feel it.

Riggall of Milford says over the past couple of years he’s been more weighted internationally.

He sees better opportunities overseas, noting the limited nature of companies in the New Zealand market.

Bond markets and the fiscal stimulus trend

Turning to the bond market, the consensus is that yields will remain low as interest rates aren’t expected to rise significantly anytime soon.

Differences in returns in the bond market will stem from the duration of bonds as well as their risk profiles - IE whether they’re typically lower risk government bonds or higher risk corporate bonds.

Kiwi Invest’s head of fixed interest, Diana Gordon, is wary of the uptick in issuance of longer-term bonds, as there’s a trend for governments around the world to turn to fiscal policy to stimulate economies.

Monetary policy, or cutting interest rates, has done much of the heavy-lifting since the 2008 Global Financial Crisis getting people to spend. So governments are under pressure to open their wallets to spur growth by investing in infrastructure, cutting taxes, increasing benefits, etc.

Governments will accordingly look to issue bonds to raise money.

And because much of this debt may be longer-term, Gordon is mindful greater supply of these sorts of bonds could lower prices.

She therefore believes it’s prudent to invest in bonds with shorter 4-8-year maturities.

Also, bonds with longer maturities are more sensitive to market changes.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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The real way to make money is to swap your junk bonds for treasuries. Then borrow cheap money on the repo market with the treasuries. Then use that money to buy junk bonds and more swaps. Rinse and repeat until there is a collateral shortage, or the large banks realise that the treasuries you're posting as collateral are actually backed by junk bonds. This would likely go on to cause a massive collateral shortage in the repo market and leave the banks holding the risk for the hedge funds.

What a time to be alive.

Repo madness, Jeff Snider, Eurodollar.

As always, well-located property is a good bet for the future.


Agreed TTP
I am picking rate of regional housing growth rates to slow - but still be positive - and Auckland to be around the 2 to 3% with likely RBNZ tightening of LVRs for economic stability reasons if prices increase by much more. Any FHB waiting for a downturn in house prices are going to be disappointed.
Currently I don't see much likelihood of further OCR cuts as the economy seems to be trucking along OK, RBNZ don't have too much powder left and will be using only if necessary, and they wont want to be fueling what appears acceptable house price inflation by lowering interest rates.
We hear that property is over valued and and yields for shares are out of kilter by historic standards. However, as the article points out, the reason is quite simple; we are in a world awash with cheap cash so it is no wonder investors are looking to assets such as property and shares as the returns for cash are minimal.
The outlook for both property and shares currently seem reasonable and stable, especially with elections both in the USA and NZ later this year with both Trump, and locally, Jacinda looking to avoid anything to cause economic upsets. Last year's issues of trade wars, Brexit and Iran seem pretty well settled. Locally the Government is looking to economic stimulus through spending on infrastructure - the expenditure on school maintenance is more to do with stimulating regional economies related to the election rather than any outstanding urgent need.
However, I would be paying down the mortgage as much as possible, and keeping a weather eye open as regards equities and KiwiSaver fund.

However, as the article points out, the reason is quite simple; we are in a world awash with cheap cash so it is no wonder investors are looking to assets such as property and shares as the returns for cash are minimal.

Yes, but NZers are not really net savers of cash anyway. Typically, those with any cash savings are older and not necessarily looking for property and equities.

However, I would be paying down the mortgage as much as possible

But this is detrimental to the economy so it's a double-edge sword. You think you're being "prudent", but consumer spending growth is crucial to the NZ economy. What do you think would happen if NZers collectively started paying down debt?

As always, a well diversified portfolio across asset classes and geography, is a good bet for the future.

Pay down your mortgages, and/or add value to your existing assets.

While one can not escape all downside exposure, liquidity in the markets can disappear in a moments notice, leaving one vulnerable to predators if one has to sell.

Cashflow is king in downtimes. All the best investing.

Do you invest in managed funds? Been looking into it as just holding cash isn't all that productive but I'm not clued up with stocks, bonds etc

The phrase cash is king came out of the asian financial crisis. However this is cashflow is king. Money is invested in income producing financial instruments in this case. For example I have a proportion of my portfolio in dividend shares. Having regular income means you have something to spend if it's needed or just reinvest it. Also if you do need a loan at any point having income looks better than none.

How do you choose individual shares? or do you pick ETFs

I use a customised approach based on modern portfolio theory. A proportion around 50-60% ETFs. I have a managed fund in the mix along with dividend shares.

I won't go into detail over share selection as an ETF will do the job. I do apply techniques based on valuation and some that are more often used by traders. In a sense I am a trader but over a very long time period, for most dollar cost averaging will do the job better than stock picking in combination with a 3 yearly portfolio rebalancing.

I also have other tools that I am building that I will automate at a later date. Again this is something that you don't need to do to get excellent returns on a portfolio. Remember that statistics show that people who forgot about their portfolio outperformed those that made decisions on buying and selling actively.

I recommend this book as well. If you read it by the end you will know modern portfolio theory. At that point you just need to decide what composition your portfolio should be.

Hi youngdumbandbroke. It will pay you dividends (excuse the pun) to build up your own knowledge about stocks and the sharemarket, regardless if you pick your own stocks or have a managed fund.

Folks, if you're interested in investing, you might find this piece I did in July helpful. 

I compared a few of the DIY investment platforms in NZ (InvestNow, Sharesies, Hatch). Some of the figures I used will be different now, but the piece should still give you ideas as to how you could go about investing. 

Thanks Jenee. I'll be more on the passive side of investing. So would InvestNow be better for me?

There are index-tracking funds listed on all three platforms. For example, Sharesies and InvestNow offer the NZX's Smartshares funds, while InvestNow and Hatch offer various Vanguard funds.  

InvestNow looks more straight forward regarding currency and no brokerage fees?

Options range from ongoing piling into leveraged assets (shares/property) for low yield but cap gain, to hoarding canned food, bullets and medicine. Take your pick. In someways the problem is made worse by the ongoing creation of FIAT money, feeding the need to find a home for it.

Ahhh the good old days where money was hard access and there was a nice balance between asset prices and incomes.

I'm going to plant a few coins and notes in the back garden and see if I can't grow me a money tree. If you don't hear back from me on this then it either didn't work and I'm too embarrassed to say, or it did work but I don't want to cause hyperinflation by having all and sundry do the same.

I just bought a printing press, will see if I can beat the other countries printing and trying to get ahead of the game. I know it maybe illegal to print and be damned, but I figure, if they can get away with theft by inflation, I may as well print a few trillion, buy a General or two, maybe even more and a fleet of trucks, an Air-force a Navy and a lot of Drones to drone on and on about Housing. Might as well Play Monopoly and get with it Big Time. If anyone wants to invest in the Futures, and join me and a few thousand million others and buy Gold Frankincense and Oil, as well.....please post a cheque to me via my online Banking meme at all Banks...SuckerTaxPayerkeeponspending. Ta...Taxinda.

No share broker is going to tell you a bust is coming, sell all your shares, (in the history of sharebroking) :)

You have to factor age into this: if you're within 10 years of retirement, or certainly 5, and you pretty much have the nest egg, shares right now seem a hell of an unwarranted risk, with the US markets up in space somewhere; share values have never been more expensive in history (by some measures).

It's just a pity central bank stimulunacy has sacrificed the yield/income of the prudent and risk adverse, especially the elderly, to outright speculation on the money supply (because earnings and company fundamentals aren't even in the picture right now - well, until they are with a rush).

This global command economy is immoral, and that on steroids since the GFC. The reckless Frankenstein created by monetary policy (that little clique of suited men and women bureaucrats) is unprecedented, and there is not a single human being or AI, for that matter, on this planet, bull or bear, who can predict where this all ends when it unwinds back to market realities; that's why Buffet has so much in cash. The only thing I care about is preservation of capital: but that is pretty much impossible.

I wonder if anyone is checking on the settings of their Kiwisaver?

Sorry, in the first sentence replace sharebroker with fund manager.