Market outlook 2014: Goldilocks is back!

Economy2014medium(copy)(copy)2014 has started well from an economic perspective with many markets hitting new highs. Parts of the New Zealand economy such as residential housing, dairy farm prices and some shares, are at historical highs and may suffer a correction in coming months. However, in general, we are in what is commonly called a Goldilocks economy where things are neither too hot nor too cold – there is sustainable economic growth with low inflation, and there is market-friendly monetary policy. This all bodes well for a pretty good year for those who have a diversified investment portfolio. Many fund managers are predicting strong growth from local and international sharemarkets and are increasing their exposure to selected markets. However, local interest rates are forecast to rise and this will significantly dampen the performance from New Zealand fixed interest funds. Interestingly, leading fund managers such as ANZ Investments are predicting better returns from international fixed interest than from cash and are overweighting their asset allocations in this area.
As with all other years, there are bound to be events which will destabilise the markets and negative economic news always seems to gain greater prominence than the positive things happening around the world. Try to block out the day to day market noise and focus more on the longer term trends and what your portfolio is intended to do for you regarding your goals. Paul Samuelson, a renowned economist and Nobel Prize winner once said “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
No one can accurately predict the future. Market downturns will occur but these are healthy as they can wash out excess optimism and set the stage for further gains. The ups and downs are just part of being invested.
 A few tips for 2014:
  • Be comfortable with your investment portfolio: There is always uncertainty when investing. One of the key roles of a financial adviser is to help you mitigate the risk and help ensure you are comfortable with the risk you are taking and how it meets your objectives.
  • Stick to the plan: Markets will rise and fall. Unless there are changes to your circumstances (eg: you retire) then stick with the plan. Changing investment direction to try and accommodate short-term economic events can be costly.
  • Rebalance: Rebalancing is where we bring your portfolio back in line with the nominated tactical or strategic asset allocation. It often involves selling something that has risen in value and buying something cheaper.
  • Dividends and income are good: Holding investments with strong dividends and income may seem boring and not as exciting as putting your money into something like Xero shares. However, dividends indicate a company is making a profit and after all the hype has died away, it is profit that really drives the value of an investment. Putting your money into something that is rising dramatically in value but does not yet produce a profit is more akin to speculation than investing. There is nothing wrong with chasing a few speculative stocks provided it is in moderation, the risk is understood, and you are aware that there is no such thing as a ‘sure bet’.
  • Think internationally: Our local market has had a number of good years and is becoming pricey. It makes sense to invest internationally while our dollar is high and you can buy high quality investments for a relatively low price. International investing increases your diversification and helps potentially reduce your risk.