When it comes to predicting short-term performance of investment markets, nothing is surer than what is predicted, actually fails to occur. At Milestone, we like to take a longer term perspective around investing and look at the trends and the bigger picture, rather than trying to pick when best to buy or sell. The old adage of “time in the markets” rather than “timing of the markets” will be particularly important this year.
We need to keep reminding ourselves that the period from 2009 to 2015 was fantastic for sharemarkets and managed funds. The markets recovered from the losses in 2007/08 and in many instances rose to new heights. The markets performed well above their long-term averages, and regularly provided double digit returns. However, nothing keeps rising forever and markets have cycles. Over time, sharemarkets rise but that rise is never consistent. The past five years were outstanding and this year will be a mixed bag as the markets readjust and return to their normal trend line.
2016 has already got off a very rocky start with sharemarket falls in many countries and concern rising about the financial situation in China. Around the world, many traders were spooked by the Chinese stock market falls and have been predicting the worst. The reality is that China is not a cot case. It’s economy is still growing - albeit at a slower rate than over recent decades. However, the new reality is that China is a major economic player and if it slows down, then nervousness inevitably kicks into the markets. The good news is that the largest market (the USA) is growing and showing many positive signs. This along with a small European recovery will help offset weakness out of China.
So, what can investors expect from 2016?
• NZ bank interest rates continuing to stay at historic lows. Therefore, keeping large sums of money on term deposit will not make you rich.
• The NZ dollar may weaken against the US dollar, particularly if the USA economy continues to recover and our dairy commodity prices remain low. This means that if you already have money invested in unhedged international managed funds, you could be rewarded with a currency gain.
• Auckland house prices may stabilise. What this actually means is anyone’s guess - but the likelihood of continued double digit growth in Auckland house prices is low and a small fall in prices in some areas is possible. This means that purchasing an investment property in Auckland is now considerably more risky than over recent years. Any purchase should be regarded as a long term-decision and factor in the implications of higher mortgage interest rates in years to come. Do your budgets on whether you can afford to service a mortgage at an average rate of 7%.
• Much lower returns from shares and possibly even a negative year for some shares and share-based managed funds. This is a year when active management by a quality fund manager may obtain better returns than a passive investment in an index which makes a loss.
• An increasing focus on what is happening with commodities. For us in NZ, this particularly applies to the global dairy trade prices. If these prices fall further, and the projected farmer pay-out levels are not achieved, then many dairy farmers will be under even worse financial pressure and this will have a negative impact on many sectors of our economy. Therefore, our investments need to be sufficiently diversified so we are not overly exposed to local and international businesses dependent on rising commodity prices.
• Interest rates in many large countries will slowly start to rise. This will put pressure on international fixed interest funds.
The consensus from economists is that 2016 will be a mixed year for investors. Expectations need to be lowered and investors need to appreciate that short-term losses in investment value are a natural part of the economic cycle and these need to be endured in order to obtain longer term returns better than term deposit rates. The good news is that when investment prices fall, it is like buying groceries on special at the supermarket. A prudent investor would take advantage of these ‘financial specials’ to buy more investments.
Give your Milestone adviser a call if you have any queries on the markets, investment opportunities and your specific investment portfolio.