Shares providing higher yields than bonds right now!

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It's a strange world - shares providing higher yields than bonds right now!

Beware - the good "old" days are here

New Zealand's economic performance relatively good considering....

Last chance to enter our competition to win a trip to Fiji

By Murray Harris, National Investment Manager, Spicers

One outcome of the recent share market volatility, is that investors in the United States and Europe have fled to the relative safety of bonds. As a result, we’ve seen US government treasury yields coming down to ever lower levels. US 10year treasuries were already at record lows in June / July with yields at around 3%, but over recent weeks the demand for 10year US treasuries has seen their yield come down as low as 2% (in fact 1.95% as at day of writing this on Sept 20th 2011).

At the same time, US companies have maintained their dividends at pretty healthy levels in order to help keep their shareholders happy during these more difficult times, particularly in the low interest rate environment we are in.

As a result of strong dividends, many individual shares in the US are yielding more income than US treasuries, as is the S&P500 index. As of mid September the dividend yield for the S&P500 index was 2.24% versus 2% on US 10year treasuries, 0.91% for US 5 year treasuries and a meagre 0.2% for US 2 year treasuries.

Looking across the S&P500 share index, as of mid-September, 46% (or 233) of the S&P500 companies had dividend yields higher than 10year treasuries and just over 60 companies offered yields which are more than twice that of 10year treasuries.

But are the dividends sustainable? Will companies reduce or stop paying dividends if things get tougher for them?

According to Standard and Poor’s, dividend increases rose nearly 28% during the first quarter of 2011, with 510 US companies increasing their dividends, up from 399 in 2010. Only 30 companies out of the 7,000 (approx) listed in the US, reduced their dividend payments this year, compared to 48 during the first quarter of 2010.

In New Zealand the story is very similar. The current dividend yield across the NZX50 is around 7.5% (as at 31 August 2011). Compare that to the Official Cash Rate at 2.5% and the average bank’s 12 month term deposit rate of about 4.5%. Generally, the dividends from shares are providing a healthy margin over and above cash returns right now. This is an important benefit of diversification which investors should consider.

The point is, that even with the recent share market turmoil, investors should not write off shares as a valuable part of their portfolio. Right now some good income is being generated from these “growth” assets and the recent volatility has also meant that investors have been able to buy good quality company shares at very cheap levels. In addition, shares provide the added benefit of capital growth over time, which you don’t get with holding bonds.

It is a strange world we live in at the moment. However the ups and downs of global share markets should not deter investors from maintaining a well diversified portfolio to see out the current financial storm….and you don’t have to hold only defensive assets (cash and bonds) to do that!

Standard and Poor’s data used in this article sourced from www.cnbc.com. 

Once upon a time, the need to plan for your retirement was not considered particularly important. In 1951, the average life expectancy for New Zealand males was just 67 years and for females it was 71 years. So why waste time planning for a retirement of perhaps only 2-6 years? If you were going to need any additional income over that period, then the universal pension would probably do just fine.

Times have changed dramatically in the last 60 years.

Advances in medicine, diet and environmental factors have all contributed to a significant increase in life expectancies. Average male and female life expectancies today (from birth) have increased by 11 years each. While that should give ‘Generation Y’ some considerable food for thought, what about people who are approaching, or already in, retirement?

The latest demographic data suggests that if you are already 65 today, an average New Zealand male can expect to live another 18 years and a female can expect to live another 20 years. It gets better (or worse, depending on your viewpoint!). If you are already 80 years old today, you have about a 50:50 chance of living into your nineties. It is also worth noting, these are averages taken across the whole population, so half of you are likely to live even longer!

But what does it really matter if people are living a lot longer these days?

What this data confirms is that New Zealanders today face the very significant possibility of living well into their 80’s or even their 90’s. In the financial planning world, this possibility has been given a name – it’s called “longevity risk”. In a very practical sense, it is the risk of outliving your money.

Before longevity risk becomes an issue for you, I suggest you ask yourself an important question – “if I’m going to retire at age 65 and then possibly live for another 25 or 30 years, will New Zealand Superannuation alone afford me the kind of lifestyle I want for the rest of my life?”

If the answer is “yes”, then I have to assume you are planning to have all of your big expenditure items (such as property purchases, overseas travel etc) out of the way by the time you retire. This will be even more critical if, as anticipated, New Zealand Superannuation is ‘adjusted’ in the future due to its lack of affordability. This is already happening in other countries around the world and New Zealand politicians will not be able to sidestep this issue forever.

If the answer is “no” and you are still in the workforce, then you probably still have some options at your disposal. However, I would strongly urge you not to delay. The sooner you sit down and work out what you want your retirement lifestyle to look like, the sooner you can begin to put the necessary financial plans in place to achieve it.

Source: Demographic data used in this article has been taken from the New Zealand Period Life tables published by Statistics NZ.

By Bevan Graham, Chief Economist, AXA Global Investors

We recently got the latest ‘temperature check’ on how well the New Zealand economy is performing amongst a world of mixed fortunes for the global economy at present. New Zealand June quarter GDP came in lower than expected at +0.1%. This was a marked slowdown from the revised +0.9% (previously +0.8%) in the March quarter. The December 2010 quarter was also revised up from 0.5% to 0.6%. The annual rate of growth now stands at 1.5% for the year to June.

We are not viewing this as a loss of momentum for the New Zealand economy. Rather we believe March probably overstated the strength of the economy while June understated it. Put together, +1.0% for the six months feels about right.

Of course this is all history. The question is where to from here? We continue to think the growth outlook remains relatively positive, although risks around the global economic outlook cloud that somewhat.

On the positive side the terms of trade is at 37-year highs. While commodity prices have softened somewhat recently, we expect the terms of trade to remain at healthy levels. That provides a significant income boost to the New Zealand economy. To-date that has not shown through in economic activity as the primary sector has been focussing on debt repayment. There is anecdotal evidence, however, of increased on-farm investment activity recently which is positive.

Recent wage growth means that households are now able to grow consumption while still focussing on debt repayment. That has been reflected in relatively healthy levels of consumer confidence. However, we continue to expect only modest consumption growth over the medium-term. Right now the Rugby World Cup is providing a boost to consumption which will be reflected in September/October retail sales data.

Business confidence remains at healthy levels, despite the cool winds blowing from overseas. That bodes well for investment in the period ahead. As with the outlook for all developed economies, we have looked to business investment (and exports) to be key areas of economic growth, especially while households are constrained by deleveraging.

It appears the New Zealand housing market is bottoming out. However, as with consumption, we are not expecting a strong recovery. The exception is of course in the Canterbury region where earthquake reconstruction will provide a significant boost to construction activity in 2012, although the precise timing remains uncertain.

That of course assumes that global economic and financial conditions do not take a serious turn for the worse. That is the key risk to the outlook: We would not be immune from a sharp slowdown in global growth. Already increased finance sector risk is having an impact on the cost of funds. A sharper slowdown in global growth than we currently have would also have a negative impact on commodity prices.

Our forecasts currently have annual GDP growth at 2.3% for the year to December 2011, followed by 3.6% in the year to December 2012.

Investors in the New Zealand share market have managed to ride out the global market ups and downs relatively well. Our market is not subjected to the big booms or plunging busts of many of the large global share markets, so investors who have remained well diversified and maintained an allocation to New Zealand companies have been well rewarded, with the NZX50 having delivered a return of 9.45% for the 12 months to 31 August.

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The Spring edition of ‘The Adviser’ magazine gives readers the chance to win a fantastic trip to Fiji. Spicers have teamed up with Sofitel Fiji Resort & Spa to offer this luxury break valued at more than $3,000.

The competition closes on 20th October at 5pm so be sure to get your entry in before then!

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• Travel insurance

To find out more about how to enter the competition and to download your free magazine go to ‘The Adviser’ magazine competition page here.

Your feedback is welcome

Financial Update is a regular publication published by Spicers Portfolio Management Limited. It discusses topical investment and financial planning issues. A disclosure statement is available on request, and free of charge from you adviser.

The Spicers approach is to meet with a potential investor and ascertain what their individual needs are before making any recommendations. We believe that quality advice incorporating a robust planning process should be the foundation of any investment service provided.

The planning process starts with discussing what is important to clients. This may include achieving financial independence, repaying the mortgage, educating children, supporting ageing parents – all while enjoying a good lifestyle. We then review the overall financial position now and how it might unfold in the years ahead.

Once we know what is important and how the financial position looks, we can then work with our clients to tailor a financial plan to help make it happen. Importantly, once we understand what is important to our client, we can then provide a specific recommendation on the type of investment portfolio to support the plan.

Please provide feedback directly to your adviser or email spicers@spicers.co.nz

Disclaimer

The information in this publication is of a general nature only and is no substitute for personalised advice. If you would like advice that takes into account your particular financial situation or goals, please contact your financial adviser.

The information has been published in good faith and has been obtained from sources believed to be reliable and accurate at the time of publication (19 October 2011). The opinions contained in this document reflect a judgment at the date of publication by Spicers Portfolio Management and are subject to change without notice.  Past performance is not indicative of future performance and is not guaranteed by any party.