How much further can investment portfolios rise?

shutterstock 122256166-526We have seen a substantial rise in investment portfolios over the past 12 months. However, a new government is now in place and it intends to make a number of sweeping changes to the social structure of New Zealand.

We know from past experience that there is a long-term trend line with investment values for different assets and if markets rise or fall too dramatically, then they will correct and ultimately come back to their long-term average performance. Some pessimistic commentators are predicting a crash in market value while the more optimistic believe there is still more upside growth to be obtained. Milestone sits in between these contrasting views and provides three reasons why we should be cautiously optimistic from a New Zealand investor perspective.

The New Zealand dollar: The NZ$ weakened with political uncertainty and ANZ predicts that our dollar will continue to weaken against the US$ over the next 18 months. This is great news for those already invested in international investments as it means the value of those investments rise when reported in NZ$. However, it is not too late for those just contemplating investing into offshore assets as there could be further currency gains over the next 18 months. Additionally, economists feel that share markets around the world still have some growth left in them.

Good active management can protect against the downside: Active management is where the investment manager uses its skills to select the most appropriate investments for the fund risk profile. When markets are booming as in recent years, the difference between active and passive management is minimal. However, as the market becomes choppy and more risky (as it is now), then investing via a diversified portfolio of high quality active managers can provide a degree of protection. If a major fall in stock market value was to occur, then active managers cannot avoid some reduction in fund value but through careful stock selection and prudent use of hedging and other techniques, they can certainly reduce the size of the fall. Many managers are now moving to higher quality stocks; having more cash within their funds and reducing their exposure to regions and sectors most likely to suffer in a fall. They are re-allocating the money to areas that have sustainable growth ahead of them.

NZ still in good heart: Our economy is transitioning in terms of its growth drivers and dealing with headwinds from difficulty in finding staff and a soft housing market. When you add a new government with big future plans into the equation, then it does create a sense of apprehension for some investors. However, there are many positives. Inflation is predicted to stay low around the 1.5-2%; interest rates as measured by the Official Cash Rate (OCR) are expected to stay under 2%; commodity prices are holding up and could benefit further from a weaker dollar; the government is likely to pump billions of dollars into the market to implement its election promises, and overall economic growth is expected by ANZ to be in the 2.5-3% range.

Nothing is guaranteed and we should all be dubious of anyone who predicts doom or sustainable growth without risk. Markets move in cycles and what goes up typically goes down until it averages out at the long-term trend line. The key is to have a diversified portfolio of high-quality investments that are regularly being reviewed and tweaked to meet the changing economic environment in which we live.

Give the team at Milestone a call to discuss how the market changes are impacting on your ability to fund your financial goals.