Prepared by Katrina Hawker, Capital Investment Planning Ltd
As 2008 begins, the news is dominated by reports about financial markets at home and abroad. The issues follow on from last year. At the start of 2007, problems stemming from poor mortgage lending practices in the US, the “Sub Prime” problem, gathered momentum and, by the end of the year, the effects were being felt across the globe. The proverbial “telephone number” figures have been quoted as write-down amounts for loan assets owned by some very large global players. The size and significance of the US economy means that problems there affect the rest of us to a larger or lesser extent depending on our participation in the markets.
Running alongside, but not parallel, are local issues. The NZ economy has been slowing as higher interest rates reign in spending and the demand for property drops away. The markets have been somewhat problematic with fourteen finance company failures to date, nervousness about others and a year of overall negative returns for the NZ share market. Add the foibles and frailties of the human psyche – people’s propensity to feel either overly optimistic or pessimistic - and you have all the ingredients of a “perfect storm”. With pessimism prevailing, the start of 2008 has been marked by some huge market movements in share markets here and offshore.
For some local investors in the Australasian share market, taking profits now is sensible. Even with the most recent falls, those who have been invested in local shares over the last 4-5 years have been able to realise very attractive gains and some down-weighting now is in order.
It is interesting to note comments about the first Kiwisaver returns. The scheme kicked off six months ago with many first time investors opting for funds with exposure to local shares. Returns for this very short time frame are looking patchy and are coming as a shock to some. This is a great opportunity for Kiwisaver investors to improve their financial literacy.
So, as we go into 2008, let’s pause for a moment and recap on the “stars” (and others) of 2007. The stand out performers were Australian shares, Asian shares and some of the structured share and specialty managed funds. Starting with Australian shares, Australia has the resources that China and other places needs. The continuation of the commodity boom as well as a generally strongly growing domestic economy was a positive environment for the Australian share market last year. Asia, excluding Japan, is an area characterized by economies which are growing strongly. Young populations are willing and able to supply outsourced labour for the manufacturing of goods and the supply of services to the West.
Also performing strongly were some of the structured products invested in Asian share market indices and widely diversified hedge funds. Some of these have the advantage of locking in gains.
A selection of notable fixed interest offerings came to the market last year. The most spectacular issue was the nine hundred million dollar perpetual Rabobank offer (AA rated by S and P with a 9.48% coupon). Others like Origin, Credit Agricole and South Canterbury Finance took in lower amounts but saw coupons of around 10% and above being offered to investors. Cash became more and more attractive last year. Call and short term rates have notched up with 8-9% available from some quarters.
Following on from 2006, the tally for finance company failures increased as investor sentiment turned distinctly negative. High cash rates and good tradable fixed interest investments where funds are not locked in were seen as more attractive. Finance company roll over / reinvestment rates declined further and the squeeze went on some underlying asset areas, notably property. Some highly profitable and well run finance companies remain in the market but are having a more difficult time because of the wider problems in the sector. Regulation is around the corner but will not be implemented until 2010. Between now and then, many are using the opportunity to obtain a rating from Standard and Poors, Moodys or Fitch and manage their books in a difficult environment.
Whilst most commercial property is well leased and is retaining its value, listed and unlisted property trusts fell from favour in the latter part of 2007. Yields are good because share/unit prices have fallen. Overall, these investments ended the year with modest returns, at best.
The PIE tax regime was introduced last year. The benefits of this will really swing into gear on April 1st 2008 giving managed funds a considerable edge over direct investments.
It’s extremely difficult to predict what will happen in 2008. Uncertainty is, and always will be, our constant companion but diversification our greatest ally.
as at 31 December 2007
|
1 Year |
3 Years |
5 Years |
|
Avg % p.a. |
Avg % p.a. |
Avg % p.a. |
| Inflation (Dec 07) |
3.20 |
2.90 |
2.60 |
| GDP real (Sep 07) |
3.30 |
2.70 |
3.50 |
| Housing (Sep 07) |
11.4 |
12.1 |
14.8 |
|
|
|
|
|
| 6 month Deposit (Dec 07) |
7.7 |
7.1 |
6.4 |
| 90 -day Bank Bill (Dec 07) |
8.3 |
7.6 |
6.9 |
|
|
1 year ago
|
3 years ago
|
5 years ago
|
| NZD/AUD (rate x years ago) 0.8784 |
0.8805 |
0.9315 |
0.9051 |
| NZD/USD (rate x years ago) 0.7738 |
0.6918 |
0.7142 |
0.5095 |
|
|
|
|
| NZD/AUD (% chg) |
-0.1 |
5.7 |
2.7 |
| NZD/USD (% chg) |
-10.0 |
-7.1 |
-33.7 |
|
% return p.a.
|
% return p.a.
|
% return p.a.
|
| NZSX 50 Gross Index |
-0.3 |
10.6 |
n/a |
| ASX All Ords Gross Index NZ$ |
13.8 |
19.5 |
23.2 |
Hang Seng (Hong Kong) |
39.3
|
31.8
|
39.7
|
|
Nikkei 225 (Japan) |
-11.1 |
11.1 |
15.7 |
| SSE Comp (China) |
96.7 |
105.1 |
57.5 |
| S&P 500 (USA) |
3.5 |
7.1 |
13.4 |
| FTSE 100 (UK) |
3.8 |
11.4 |
12.8 |
| GDAX (Germany) |
22.3 |
29.8 |
35.8 |
| CAC40 (France) |
1.3 |
15.6 |
16.6 |
| MSCI World Index NZ$ |
-0.28 |
12.41 |
6.8 |
Prepared by Katrina Hawker, Capital Investment Planning Ltd, January 2008
Capital Investment Planning Ltd, P.O. Box 22238, Christchurch, New Zealand
Phone +64 3 379 1913 Fax +64 3 377 2330
Important Note. This publication may be copied in whole or part provided Capital Investment Planning Ltd is acknowledged as the source. Investment and mortgage rates are indicative only and, whilst correct at the time of publication, are subject to change without notice. Text may be opinion only and should not be seen as a substitute for personal professional advice relative to an individual's personal situation.
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