Snowball Effect members were recently treated to a presentation from independent financial advisory firm Private Wealth Advisers, as part of Snowball’s Investor Masterclass series. The crowd enjoyed an engaging presentation from Roger Sutherland and Jack Powell, that challenged and educated participants on a wide range of financial topics. Some of the headline topics included how to evaluate a managed fund and the role of private equity in a balanced portfolio. But the topics that turned out to be surprisingly compelling were when Jack zoomed out to cover some of the macro trends in the capital markets.
Rather than try and summarise every topic covered, we have pulled out what we saw as three of the key discussion points to come out from the evening and the big questions facing investors looking forward. Some of the concepts covered in the PWA presentation were unashamedly advanced economics and finance, but at Snowball Effect we’re keen to help increase Kiwi financial literacy so sometimes it’s worth diving into the numbers.
Quantitative easing has been a key part of the worldwide central bank response to the GFC over the past ten years. QE, as it is, known is central banks printing money to buy their own sovereign bonds and increasingly other assets as the scale of the programmes grew. This has helped drive down interest rates and has encouraged investors to take on additional risk in the form of corporate credit issues or equity markets. Interest rates also act as a discounting function, which means that lower rates increase the present value of a firm’s expected future cash flows. This has helped propel equity markets to all time highs and left price to earnings ratios above their long term averages. With central banks around the world taking the foot off the gas now that we are seeing a synchronised global recovery, what will this mean for equity and bond markets?
The New Zealand sharemarket and economy has been a relative high performer when compared to international peers over this period, with the often quoted “Rockstar Economy” term being thrown round. The sharemarket in particular has been a high burner (did you know it outperformed the NZ housing market over 2009-2016) with our mix of high dividend paying and stable performing companies such as Spark, Auckland Airport and the electricity gentailers, making it highly attractive for overseas buyers in their search for yield. This international ownership of the index has now reached over 40%. What will happen if this offshore buying trend reverses? It was also noted that GDP on a per capita basis has actually been flatlining over this growth period, which suggests that the growth is not from productivity gains, but from high immigration. How do we get the New Zealand economy growing in a sustainable manner that drives GDP per capita?
There was also some time dedicated to the ever controversial New Zealand housing market, which, despite not generating the headlines it used to in 2016, continues to grind higher. NZ has the second most overvalued residential property market in the world when comparing statistics of debt to income and rent to price ratios to their long term averages, just losing out to Canada. With a new Government promising a tougher stance on inbound migration and an ambitious building programme, the discussion focused on whether we might see some selling pressure, especially given the level of mortgage debt out there when interest rates do rise.
As you can see, the threads of interest rates, inflation, growth and central bank responses to stimulate them were a recurring theme throughout the presentation. Interestingly, the very next morning the new FED chairman Jerome Powell increased its benchmark rate 0.15% and signalled an accelerated growth path for rates to come on the back of economic strength. The NZ Reserve Bank has continued to hold New Zealand’s OCR (and indirectly interest rates) steady but can we hold out forever if the tide changes?
The key takeaway from the session? Uncertainty is the one certainty in financial markets. Investors should aim to have an “all weather” portfolio - one that can perform in up markets while still providing adequate capital protection if things go wrong.
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