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Milford Asset Management's Brian Gaynor on his expectations for the economy, sharemarket, house prices, interest rates and the NZ$ in 2014

Milford Asset Management's Brian Gaynor on his expectations for the economy, sharemarket, house prices, interest rates and the NZ$ in 2014

By Gareth Vaughan

Brian Gaynor is excited. The Milford Asset Management executive director and long time observer of, and commentator on, economic and financial matters reckons he hasn't seen the stars aligning so well for New Zealand for decades.

Just before Christmas he wrote in his weekly NZ Herald column there were strong indications 2014 will be a once-in-a-generation year, like 1951 and 1974. Still with vivid memories of the 1980s sharemarket boom and bust, Gaynor's also upbeat on the sharemarket as 2014 gets underway, especially about the wave of technology companies emerging.

"There are so many things coming together at the one time," Gaynor told in a Double Shot interview.

"The housing market is pretty strong and that creates a lot of house building activity. You have the Christchurch rebuild, you have a net migration inflow - an awful lot of well educated and skilled New Zealanders coming back to New Zealand. You've got the China boom, it is a concern I guess what's going to happen in China but we are still benefiting both (through) forestry and and the dairy industry from it. The level of (business and consumer) confidence is very high, and there's a new generation of businesspeople coming through as reflected by Xero and Wynyard and companies like that."

"So it's the best I've seen for a long, long time. In fact the best I've seen for over 30 years," says Gaynor.

'Exciting' technology companies

He says Milford is expecting the sharemarket to deliver returns of between 8% and 15% this year after "good but not great years" returning 23% and 16% over the past two years. But he adds Milford's sharemarket predictions have been wrong in the two previous years because they were cautious. He says he's getting a lot of  invitations to talk about the sharemarket at the moment.

"The reason why there's renewed interest in the sharemarket is because it has done well," Gaynor says. "There's new companies coming along, these tech companies, which investors find quite exciting. To get interest in the sharemarket you need a good performance plus new companies arriving on the scene."

"But not only have new companies already arrived, we (Milford) have invested in five or six unlisted companies and we see the prospects of one or two of them listing this year, and we feel that investors will find them quite exciting if they do list."

One such company, Gaynor says, is Orion Health.

'Genuine companies with a global reach'

"The good thing is we (New Zealand) do have a lot of good tech companies. And why is that? I think it's because Trade Me and Xero have been so successful that the younger guys who worked in those companies have gone out and set up their own companies. And they've seen how to build successful companies, they've seen that you can actually do quite well for yourself and for your shareholders if you do get the right business model."

"And therefore I think Trade Me and Xero have had a very positive impact upon entrepreneurs willing to set themselves up and to try to repeat the success of those two companies, " says Gaynor.

He says he's "much more excited" about the sharemarket now than in previous bullish periods, especially the 1980s.

"I know that it's easy in retrospect but I never got carried away by the 1980s. I felt that that was very false because it was property companies and it was investment companies which had very little substance to them. Now, I'm not saying that all these IT companies will be successful because they won't."

"But we have genuine companies coming through that have a global reach and have the ability to be able to do well on an international scale," says Gaynor. "I mean you can't go past the fact that people are sceptical about Xero at the moment but so were they sceptical about Trade Me. When Trade Me was sold to Fairfax originally by Sam Morgan people thought the price ($700 million) was incredibly high."

"Well that company now is worth substantially more than that. I do think you have huge upside potential with well run technology companies that have a good market penetration and know what customers want. So I'm hoping that Trade Me will be repeated a few times. And if we were to get five or six or seven Trade Me's and Xero was to continue on the path it's going, it would be a huge fillip for our sharemarket, but also for the New Zealand economy," Gaynor says.

It would take 'eight quarter percentage OCR rises before it would begin to have a negative impact'

But with the Reserve Bank hinting strongly at increases to the Official Cash Rate (OCR) this year, and potential subsequent rising mortgage and term deposit rates, will this have a negative impact on the sharemarket?

"Our interest rates are still incredibly low," says Gaynor. "We're only at 2.5% for the OCR, which from a historical context is very low. I think interest rates, and I'm talking about the OCR, could easily go to 4%, 4.5% which would be eight quarter percentage rises before it would ever begin to have a negative impact."

"If we get back to the medium, which to me in the OCR is around 5%, that's not negative. If we start going up to 7, 8 or 9% well that is negative. But that's only going to occur because the economy gets so hot that the Reserve Bank feels it just has to dampen down demand," Gaynor adds.

"So we've got a long way to go before we start talking about an OCR of 6 or 7%."

He also points out the level of confidence, among consumers and businesses, needs to be factored in. Both measures have been running hot. Consumer confidence has reached its highest level since January 2007 according to the latest ANZ Roy Morgan survey. And, according to the New Zealand Institute of Economic Research's latest Quarterly Survey of Business Opinion, in the December quarter businesses were more confident about the economy than they've been since June 1994.

"Back in the 1980s interest rates got to 17 or 18% and the sharemarket was roaring upwards. Under normal circumstances you would have expected that to have had a negative impact. I think higher interest rates will definitely put pressure on people who have got high mortgages, particularly people in the medium income group, and they may negatively impact retail spending," says Gaynor.

"But overall I don't expect that the increase in interest rates this year will have a negative effect on the economy, albeit it may do in 2015. But I think as far as 2014 is concerned it's unlikely to have a major impact. But obviously in the medium term they will."

Migration inflow to drive house prices

Meanwhile, Gaynor says house prices may rise by more than the 4.5% to 5% consensus expectation of economists this year, especially in Auckland.

"I think it could be higher than that because the thing that we're seeing more than anything else is returning New Zealanders. The external migration inflow is turning around quite dramatically and that's one of the biggest impacts, particularly in Auckland because 90% of the people coming back are going to Auckland," Gaynor says.

He's hoping for a big increase in house building to tackle a lack of supply.

"We're not getting enough new houses built, and we're not getting enough new houses built close to the inner cities. And it does appear that in Auckland at least there are major efforts to free up land and to quicken the process that allows people to develop new housing," says Gaynor.

"You're seeing a lot of ads now in the paper for new apartment blocks going up. Some of them will be good, some of them will be bad. But this is what we need."

"The Auckland housing market this year should remain reasonably strong, albeit I hope the prices don't rise by more than 10% because that's when you get into dangerous territory."

'Exporters need to learn to live with a strong dollar'

As for the strong New Zealand dollar, up around A94 cents and US83c, Gaynor says although this is tough for manufacturers, they may have to learn to live with it.

"I think our exporters have to learn to live with a strong dollar because in the end that's a reflection of confidence that there is in the New Zealand economy," says Gaynor.

Nonetheless he's hoping the dollar peaks around the levels it is at now, but suggests it might not fall far unless there are "some real problems in China" or other emerging markets.

"We (Milford) spend a lot of time trying to gather as much information as we can from China. We have a Chinese speaking fund manager here who keeps us informed about the local press and what's happening over there," Gaynor says.

"The best we can say at this stage is it (China) is a concern rather than a threat. Australia will suffer obviously if China goes down. I've been over there (Australia) twice already this year and I'm reasonably confident about Australia. You are getting a pick up in the housing market, some of the confidence levels are rising," says Gaynor.

"It's not going to be as good in Australia as it was over previous years because they didn't have a recession during the global financial crisis. But should China take a big drop down it would affect Australia. But at the moment we're not predicting either of these (events), although we're keeping a cautious eye on them."

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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I think Mr Gaynor is spot on with most of his thoughts on the New Zealand economy and I am very comfortable with investing in the New Zealand housing market.
Bring on the next few years.

Read the title YL. It's only going to last a year.

I am looking forward to the next 30 years in New Zealand. It will continue to be a wonderful country to live in and invest in.
Don't miss out.

Strong performance from the NZX tech co's already this year, wouldn't be surprised if all of them double or triple their share price this year.  Expect the retailers to take off also, happy days. 

Pleased to see someone is putting their capital in the right place.  :)

... not so bullish on retail stocks , particularly clothing companies .... the internet is white anting their business model  ....
Came across an Auckland based pharmceutical firm , deep in researching new products for the American market , which chose to list on the ASX and not the NZX !
... but yes , good to see Kiwis casting their investment gaze beyond just stoopid houses .... Recall when finance companies was the only place to invest in , it wasn't that long ago .... property investors beware !

Good point on the retailers but that depends on whether you are buying for long term hold. 
Who is the Auckland based pharmceutical firm?  PEB has done well on the NZX these last few months and should be a recipient of some of this years enthusiasm. 
I've had some fun with GEO these last few days; it's better than having a real job :o)

Neuren Pharmaceuticals ( ASX : NEU ) .... you can click onto their website from there .. ... follow the " investors " link ... and click onto analysts reports ...'s just one potential world beating company domiciled here , out of many .... which very few individuals  know anything about ...

I wouldnt hold my breath.  Other big pharma companies bailed out of neuroprotective agents due to a lack of efficacy.  Most drugs fail on phase 2 due to a lack of efficacy.  Neuren is entering into phase 2 and its highly likely that those 10c shares will be worthless in a years time.  Still, roll the dice, why not...

Thanks, will take a look.  It's a shame they're not in the NZX, considering the impending drop in the AUD

Still, the AUD isn't a bad deal at present even if it slides a bit more, especially if you have plenty of time.

Possibly wrong on immigration. If they are returning NZ citizens then unlike newcomers they have family ties elsewhere in the country. They will not be able to afford Auckland so will go to other places where they can reconnect.

Not in my experience BB3, returning NZ citizens are often coming back from the Aussie mining boom with pockets full of AUD or high paying London jobs and pockets full of GBP.  Compared to the flats and apartments they were able to buy in those cities Auckland will look cheap. 

Not many in that category. More likely they will have tasted the fruit and been disappointed.

You are so right Basel the 3rd

True. Anyone who sold their house in auckland two years ago and took off to australia, and, now contemplating a return will find they won't be able to buy the equivalent of what they sold, the AUD has fallen 23% against the NZD in that time, while Auckland house prices have also gone against them. Yes, they will go other places

Some will go to other places but for many Auckland is the only viable option when considering a return to NZ. Everywhere else is a bit quiet for many after living in big overseas cities.

Machiavelli.  If Auckland is your choice then thats good.  Do it.  But you make the mistake of thinking that everybody thinks like you. 
From where I live Auckland are low income in comparison.  (well you got about 100,000 people doing well - but don't forget the rest)  Average Aucklanders have less disposible cash in pocket because of the huge mortgage sucker.
Interesting factoid.  Admittedly of a few years ago.  Highest partner income in law partnerships was  - drumroll - Otago Southland.

Machiavellii   - And who did Metro identify as an average Aucklander.  From memory she was femaie, polynesian, lived in Otahuhu, and worked in a factory or was unemployed.
Auckland give the glam life to very few - mind you neither does London.  Most there are not heading off to the counties for a weekend at the Camerons.  Mostly it's just nose in somebody elses armpit on the tube.

KH, I  am fortunate enough to be in a position to have a choice and you are right I do choose to live in Auckland. After careful consideration I decided it was and is the best place to bring up my children. 


The population of Auckland along with the majority of new arrivals moving here clearly shows many people do think like me. Admittedly not everybody. I am not saying Auckland is or should be the first choice for all. But let's be honest here. Auckland is a very desirable place to live to many, myself included. 


- And who did Metro identify as an average Aucklander.  From memory she was femaie, polynesian, lived in Otahuhu, and worked in a factory or was unemployed.


Good solid houses in Otahuhu. 

You conveniently forgot the cost of stamp duty on any house they bought in australia going in, (they wont get that back) and then on the return journey the auction program costs plus real estate agents commission plus conveyancings fees on selling their house, then there are the exchange fees both ways which can be mighty expensive if they used a bank and the banks vampire Travelex. The spread is enormous. That's assuming all cash transactions and no mortgage involved. All up, not such a happy expedition. Even worse if they were "enthusiastic" or desperate or distressed sellers. Work that one out. They have potentially written off 30% or more of their original bank roll.

"Anyone who sold their house in auckland two years ago and took off to australia, and, now contemplating a return will find they won't be able to buy the equivalent of what they sold, the AUD has fallen 23% against the NZD in that time, while Auckland house prices have also gone against them. Yes, they will go other places"
hey I was one of those, sold in 2012 (Ponsonby) and bought in Brisbane.  Yes, I have lost roughly 20% in exchange rate but I've sold high and bought low. But at the time you gotta do what you gotta do...  It's never a good time to buy or sell a house!

"Anyway they would have experienced growth in house prices in both the UK"
Not so fast, depends when they bought and sold, if they bought 20 years ago yes.  But if they bought say 6 years ago they'll be facing a big loss.  The strong gains in UK house prices this year have only got prices back to where there were in 2006.

London is looking almost cheap from where I'm standing.
Can't imagine why anyone would choose to live there however.

Not cheap by any measure.

But more affordable than where you are standing most likely.

Living cost in London is much cheaper than NZ in just about all areas... except housing.  $2.5m for a 4 bed duplex in the inner suburbs.  You can get the same in Pt Chev for 800K.

We actually need a breather to get on top of the housing backlog , and we also need some rules regarding successful integration by migrants .
The huddled masses from anywhere with their sharp business practices and loose and fast attitude towards paying taxes are going to create problems for us in the long run .

You mean the jews?

.... I must've vagued out there .... he had me thinking the huddled masses using sharp business practices and avoiding paying their taxes were property investors , or politicians ...
Jews huh ! .... didn't Hitler have them all sent to holiday camps in Poland ?

They are not brain dead - they know that if we restrict Chinese immigration then there will be a kick back on our exports. NZ China relationship is a bit like the Russian Cyprus relationship that went pear shaped a couple of years ago. Dirty money needs a home.

" Dirty money needs a home " !!!! .... can I send you my address ? ... we have a spare room , with an ensuite for it .... bath and shower if it dislikes being " dirty " so much ....

It already has a home, the NZX, and with tapering in the US there will be USD looking for a home too.  Then Google, Apple and co sitting on a coupla trillion dollars will want to invest somewhere with an appreciating currency and good capital gains.  It's going to be a very interesting few years. 

I guess we can look forward to NZ becoming a vassal state of China then.

.... unless we wait too long , and the China economic miracle crumbles .... we'd best not vassalate ...

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Days to the General Election: 39
See Party Policies here. Party Lists here.