Is now a good time to take profits and re-invest?
July 2011
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World economic growth prospects
The price you pay matters
Riding the wave of old age
5 things you should know about investing in a regulated world
How is the recovery progressing in the US?
A slew of recent weak data is pointing to another soft patch for the US economy. Flat real incomes, a drop in consumer confidence and slowdowns in both jobs growth and the manufacturing sector are once again reminders of the difficult nature of the US recovery. We believe the recent weakness will prove transitory, however we continue to expect no tightening in monetary conditions in the US this year.
Are times getting better in Europe?
Debt issues in Europe continue to be a key focus for markets. Greece continues to be the centre of attention, although there is also renewed concern about Portugal in particular. The problem continues to be exacerbated by political procrastination. The simple fact remains that there is no easy answer to the problem. Fiscal austerity can be expected to have a significant constraining effect on Europe-wide economic growth in the years ahead. Even Germany is likely to slow this year in the face of lower global growth.
Has China managed to control its soaring inflation?
Growth in China is also slowing, with GDP growth of 9.0% expected this year. Together with a weaker outlook for the US, the disruption to global supply chains from the devastating Japan earthquake and fiscal consolidation having a constraining effect on growth in other key developed economies, we now see global growth of 4% in 2011. This is down from 5% in 2010. Given the recent slowdown in the growth indicators and with (headline) inflation peaking, we think interest rate increases may soon be over.
What are the growth prospects for the UK?
In the United Kingdom, we are not as optimistic on the growth outlook as the market consensus. We think the aggressive fiscal austerity program there will constrain growth by more than most seem to be expecting. We continue to expect GDP growth of 1.6% in 2011.
How are Australia and NZ doing?
Growth in Australia and New Zealand has been impacted by the immediate consequences of significant natural disasters. Australian GDP contracted 1.2% in the first quarter of 2011 and New Zealand is expected to post another flat GDP result for the same period. However, both economies are expected to recover strongly in the period ahead reflecting respectively the repair work from the floods in Australia and the New Zealand earthquake.
Will NZ have enough labour to rebuild Christchurch?
We continue to believe the labour market will be a significant constraint on New Zealand growth. While we expect demand for labour to rise sharply in the year ahead, we are concerned about whether the pool of available workers has the right skill sets to fill those jobs. That will put upward pressure on wages. It appears to us the Reserve Bank (and the market generally) is significantly underestimating the likely inflation consequences of a tight labour market.
Why is it a good time to take profits and re-invest?
Over the last six months or so our investment manager AXA Global Investors has been busy changing the mix of our diversified portfolios. Following a period of strong performance for growth assets such as emerging market shares and commodities from late last year AXA Global Investors began to take profits and reinvest funds into more defensive assets such as global and domestic bonds, and cash. This has proven to be a profitable strategy, as market conditions have recently become more challenging.
This information has been sourced from the AXA Global Investors Quarterly Strategic Outlook dated June 2011.
By Spicers Authorised Financial Adviser Damon O'Brien
One of the most common catch-phrases of the investment industry is that “time in the market is more important than timing the market”. The implication is that if you invest for long enough, then the date you initially invest is relatively unimportant, or that the initial price you pay doesn’t really matter. My response to this is “codswallop!”.
The price you pay may not matter when you are buying your dream home, because that is about lifestyle considerations. Likewise, the price you pay may not matter when you are buying your husband or wife a special present, because that is about emotional considerations. But in investing, price matters. In fact it matters a great deal.
Over the long run, the price you pay for an investment is perhaps the single most important factor in determining the returns you receive. Warren Buffett, arguably the most successful share investor in history, certainly believes it. He is a long term, “buy and hold” investor but it is not just “time in the market” that matters. The secret behind Buffett’s impressive record is his objective of only investing in outstanding companies at fair prices.
In this context, “timing the market” is not about trading in and out of stocks and markets on a regular basis, which can be a dangerous (and expensive) approach. For Buffett, “timing” is all about buying quality long term assets at an attractive price, and that’s a philosophy which Spicers fund managers aspire to as well.
Now most of us don’t have the analytical skills of a Warren Buffett, but when we look back at the beginning of 2000, global share markets, by almost any measurement, looked extremely expensive. If you subscribed to the “time in the market” theory, then you were probably still happy to put money into shares and to let long run returns take care of themselves. If instead you looked at the high share prices at that time and decided you could find a better/cheaper entry point by waiting, then you might have adopted a more defensive strategy – perhaps reducing or even eliminating your share exposures in favour of greater cash and fixed interest investments.
If you took the latter approach then history says you made a wonderful call, as global share markets struggled through a tough decade. In spite of good buying opportunities emerging in 2003 and again in 2009, the S&P500 (the top 500 companies in the US market) achieved a total return for the decade of -29%. Perhaps not surprisingly, that represents one of the worst 10-year periods in the history of that index.
However, there may be a silver lining. Guess where equity prices are now? Compared to just about any time over the last 10 years and even the last 20 years, global shares are relatively “cheap” again. Not only that, with a lot of investors having migrated to the perceived safety of cash and high quality bonds in recent times, shares are also looking attractively priced compared to these alternatives.
In the global department store of investment assets, it is shares that are being offered with the “on sale” sticker attached. While this alone doesn’t guarantee a successful long term investment outcome, it is a great starting point. Just ask Warren Buffett!
To contact Damon O’Brien, phone 0800 102 100, or email damon.obrien@spicers.co.nz
Damon O'Brien is an Authorised Financial Adviser. His disclosure statement is available on request and free of charge by calling 03 377 6675 or at www.spicers.co.nz.
Spicers Portfolio Management Limited
The last century saw a dramatic increase in the world's population: the number of people alive in 1900 was 1.65 billion; by 1950 the total was 2.59 billion; by 1980, 4.43 billion; and by the end of the twentieth century, the world's population had reached 6.07 billion.
The next 30 years will see an equally dramatic change, but this time in the age composition of populations. The rate of total population growth is now slowing – although, even so, the UN forecasts that the world’s population will top 9 billion by 2050. However, at the same time it is aging on a scale never seen before in human history. In the next 30 years the proportion of New Zealand’s population classified as elderly will go from 12% to 21% of the total population, and on a global scale the aging trend is even far more accentuated. By 2050, the number of older people will outnumber all children (i.e. the under 15s) for the first time in history.
The health and medical industries will certainly feel the pressure as this population grows. The ageing population will require more medical services, and drug companies, hospitals and medical centre operators will have to contend with increased demand.
Industries that supply goods or services for leisure activities are set to benefit. New Zealanders are passionate about the outdoors and their sport, and businesses that supply golf, gardening or fishing goods and services (to name just a few) are likely to grow two-fold over this period. Travel industries will also benefit as this generation has time to reacquaint themselves with our country as they travel to visit family and friends.
More money will be spent on ‘luxury’ goods and services as grandparents spoil their families. Manufacturing companies will be looking ahead to some positive changes.
It is not hard to guess which businesses will prosper over this period and savvy investors will do their best to exploit every possible opportunity. Wise investors will thoroughly research the markets, the dynamics behind each company, and expected company earnings, before diving in head first.
The baby boomer generation will definitely alter industry and company dynamics as they begin to define their spending patterns. Most however, will not spend their life savings – they will play safe and tread cautiously so they can sustain their lifestyle over this period.
A financial adviser can help ensure income is generated throughout retirement years, whether it is used for leisure activities, on family, or to look after your health and well-being. An adviser will typically have access to monitoring and research resources, and will continue to provide on-going advice.
By Spicers Portfolio Management Limited
From 1 July 2011 it will be an offence for an adviser to provide investment planning services without being authorised to do so. Investor confidence diminished following finance company collapses in New Zealand and the Financial Advisers Act (the Act) was introduced in 2008 with the intention of restoring this confidence.
Find out what this means for you, how you benefit and what you should consider before investing. Download your free information pack today or request a copy by post.
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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 by calling 0800 102 100 or visit www.spicers.co.nz.
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. If you would like advice that takes into account your particular financial situation or goals, please contact your financial adviser. A disclosure statement is available from your adviser on request and free of charge.
The information has been published in good faith and has been obtained from sources believed to be reliable and accurate at the time of preparation. 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.