A few short months ago, news reports focussed on volatility in the financial markets. The markets are still volatile but these days most people are becoming increasingly concerned about their day-to-day cost of living. As we buy petrol or groceries, we can’t help but be aware how prices have risen in a few short months. A recent survey of investors over the Tasman, considered which economic factors were ‘making Australians feel vulnerable about their financial stability’. In the survey 91% were concerned about the rising price of consumer essentials, such as groceries and petrol, while 47% cited sharemarket volatility as a cause for concern.
The survey suggests that while investors clearly recognise short-term market volatility as being of concern to their longer term investment goals, their immediate focus is now on ‘balancing the household budget’ in the face of stiff price rises.
A story of sharemarkets and supermarkets
At the beginning of this year, sharemarkets throughout the world fell as concern grew over the US housing market. The ‘sub-prime crisis’ was driven by lending to high risk borrowers who went on to default on their mortgage payments. Many financial institutions such as investment banks were affected because these debts were ‘packaged’ with other loans and sold on as ‘quality fixed interest securities’. These institutions were surprised to discover they were holding sub-prime debt, and in many cases struggled to identify the full extent of their exposure.
Very quickly, investor uncertainty spread to investment grade bonds and eventually company shares. In the US, the big banks took the biggest hits, and sharemarkets fell as investors struggled to determine the effects of the sub-prime issue on company profitability, in many cases, putting their money into ‘less risky’ areas. As a result, many high quality assets were priced well below their long-term average, and some people were able to acquire some excellent bargains - Morgan Stanley estimate that the governments of oil rich nations such as Abu Dhabi have poured some $37 billion into banking sector shares since April, no doubt snapping up some exceptional bargains along the way - an example that volatility can create real opportunity.
At the start of the second quarter of 2008, the dust began to settle. All the ‘noise’ created by that burst of volatility had subsided to a more tolerable level, and investors began to reinvest. However, jitters remain, as some companies (particularly in the “financial” sector) published worse than expected end-of-year performance - this has caused further sharemarket volatility.
It’s important to remember that Spicers’ research shows that underlying fundamentals remain generally positive, and this will provide good prospects for investors over the medium term.
Lately the big story, both here and abroad, has been inflation. The author, Sam Ewing, gave an interesting (and humorous) definition: “Inflation is when you pay fifteen dollars for the ten dollar haircut you used to get for five dollars when you had hair”. After years of enjoying historically low food prices and stable petrol costs, the New Zealand Food Price Index indicated an increase of 6.8% for the year to the end of May. Broccoli lovers will be distressed that the cost of broccoli is up 37.3%! Petrol now costs well over $2 per litre - the price of crude oil has more than quadrupled since 2001. The reasons for these increases are complex and opinions are divided. Some say increasing demand from emerging economies such as India and China are driving food and fuels costs up. Others blame droughts caused by climate change for reduced food production. And then there are those who think it is speculative investors like ‘hedge funds’ who are responsible for inflating prices.
Meanwhile, it’s been reported that over 60% of the world's proven oil reserves (i.e. those that can be recovered from known oil fields using existing technology) are in the Middle East, with Saudi Arabia alone accounting for over 20% of the global total. At today's rates of production, the world has enough oil to last for almost 42 years - apparently a slight improvement on last year. Whatever the reasons, economists suggest that high food and petrol prices will be with us in the immediate term, and continue hitting consumers right where it hurts – in the pocket.
Spicers View: A diversified portfolio investing in quality assets is paramount in inflationary times. Investment in quality companies is a great hedge against ‘erosion’ of your capital by inflation. Moreover, all investors should have clear short, medium and long-term goals with their portfolios structured appropriately. Spicers balanced portfolios adopt a diversified approach which is intended to manage the risk to your investment capital in accordance with your investment horizon and risk appetite. In this regard, Spicers has recently added a new cash portfolio to complement investors’ short-term, risk-averse investment strategies.
The ingredients of PIE
Change, as you know, creates opportunity. In October 2007, the New Zealand government made some of the biggest changes ever to New Zealand’s investment taxation laws. For investors, Portfolio Investment Entity or PIE as it’s become popularly known is very good news. Tax deducted on PIEs is capped at 30%. For some investors the tax rate will be only 19.5%. In fact, if your marginal tax rate is 19.5% this could well mean a tax saving of 41% when compared with non-PIE investments. For PIE investments, capital gains on many Australasian share investments will no longer be taxed. Only income earned will be subject to tax.
Spicers View: Astute investors will agree that PIEs are well worth further investigation. PIEs present an excellent opportunity to enhance your return by paying less tax. If you haven’t already discussed PIEs and the opportunity they present with your Spicers adviser, now is a very good time to do so.
Cashing in on PIE
Most people will have a bank term deposit account, and most investors are no different. While a term deposit gives you relatively easy access to cash, and is a useful way to save for life’s short-term goals, it’s important to remember that a typical bank term deposit account has some disadvantages. For example, money in bank term deposits can be subject to penalty (loss of interest), if withdrawn before the term expires. Spicers has recently introduced an innovative new product called Premium Plus that offers you the benefits of a high on-call rate, while taking advantage of changes to New Zealand’s investment tax laws. The minimum investment is $5000, there are no entry or exit fees, your money is accessible, and you won’t be penalised if you make an early withdrawal. Simply put, Premium Plus is a very smart alternative to investing you cash.
Spicers View: If you want to maximise the returns on the short-term portion of your investment portfolio, we believe that Premium Plus offers a very wise alternative. Make sure you find out more about Premium Plus.
In confidence we trust
If you attended one of our recent ”Keeping Pace In A Challenging World” presentations, you may well remember seeing a table that showed how people rate various professions in terms of how much they trust them.
At the top of the chart were the Fire and Ambulance Services along with Doctors and Nurses. It clearly illustrated that we tend to trust those who appear motivated by selfless aims. We trust and have confidence in those professions because we believe that people in them genuinely put our well-being ahead of their own.
Confidence and trust are the foundations on which we at Spicers continue to build our relationships with our clients. Confidence and trust comes from many things, such as providing only the very best advice. For example, Spicers advice is based on a concise list of thoroughly researched investment opportunities – we’ve not recommended any of the well publicised securities which have recently encountered liquidity or capital repayment problems to our clients. Spicers Financial Advisers also hold or are studying toward a Certified Financial Planner designation. It’s an international qualification conferred by the Certified Financial Planner Board of Standards which requires those who hold the CFP certification to have met specific education, examination, experience and ethics requirements.
Remember, Spicers has been established for over twenty years and currently has NZ$1.4 billion under management. Spicers gives you the advantage of proven performance, personalised service and the large scale backing of AXA, the world’s fifteenth largest company, and second largest financial services company.
If you have any questions around this article, please contact us at any time.