Changes have been made to Capital Financial Planning’s benchmark portfolios in the last three months. “Benchmark” refers to the particular mix of asset types that make up the range of portfolios from defensive to aggressive.
Essentially, as a result of extensive research, we are moving to ensure that all portfolios have lower amounts of shares going forward.
The move is coming at a good time. A rally is currently going on in most equity markets. Since sinking to very low levels in early March, the Dow Jones Industrial Average has rallied considerably and so has the Nasdaq technology index.
Baghdad Bounce?
Some are calling this rally “The Baghdad Bounce”. Will it last or is it just a reaction to the end of the Iraq War? Here are some of the positive and negative arguments on offer:
Positive
Company earnings are moving up again. The Iraq War has not dented company earnings in the first part of this year as some feared. A majority of companies in the
S and P 500 are reporting an increase in profits averaging 13.2%, well above the forecast of 8.5% profit growth.
Improvement in consumer and investor confidence. With the peace making phase of the Iraqi conflict has come an improvement in consumers’ and investors’ sentiments about the future. In April, a well known Investor Optimism survey showed the biggest monthly jump in sentiment since October 1996. April also marked a rise in consumer confidence (Conference Board Survey) of 32%, the biggest since the end of the Gulf War in 1991.
Better-looking share prices. Many share prices are moving up with highs out numbering lows. The Nasdaq is higher overall with a higher “low” than any time since March 2000 and the kinds of shares that typically do well in the early stages of an economic recovery are doing well.
Negative
Deflation Risk. Deflation is when prices for goods fall, people stop buying and companies have no pricing power left. Companies make workers redundant and the economy spirals down from there. The US Central Bank, the Federal Reserve, recently said that they could not rule out deflation as a risk to the US economy, though they say the risk is small.
On-going employment concerns. The Fed points to employment being at risk if production slows because of decreased consumer demand. They say “recent readings on production and employment, though mostly reflecting decisions made before the conclusion of hostilities, have proven disappointing.”
The housing bubble may be about to burst. House prices have moved up considerably in the United States (and elsewhere) over the last three years. Interest rates are at all time lows allowing for re-financing, perceived lower debt paym ents, “cash outs” – all fuel for the fire keeping consumer spending going. The logic goes that, if employment worsens and people stop or delay spending, a painful downward economic spiral begins. People would sell assets such as stocks and real estate upsetting the supply and demand relationship that has existed prior to now. In short, the real estate bubble would burst.
New Benchmarks
Our decision to lower the proportion of growth assets in all portfolios is partly a response to the current balance of these negative and positive factors. It is also partly in recognition of the historically higher interest rates we are currently experiencing in New Zealand and the window of opportunity that exists at present to lock in some attractive fixed interest returns. Whilst in a general sense, we have reduced equities for most portfolios, decisions about individual portfolios are made only after full individual consideration and a process of consultation with each and every client.
If you have over NZ$350,000 to invest and want truly impartial advice, contact us to find out how we can put your money to work to fund your important goals.
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