| Welcome to the final Select Wealth Management Dashboard Newsletter for the year. 2015 has been a massive year for us. We've had a change in brand, moved into new premises, had the introduction of the Discretionary Investment Management Service (DIMS) regime, and added new members to our team at Isaacs Financial Planning. Thank you for being a part of this with us and for sharing in our success this year.
As many of you would know by now, I always start each year by making some predictions for the 12 months ahead. It's a dangerous game, because more often than not you end up with egg on your face at the end of the year. Miraculously, I started 2015 having made perfect predictions in the previous 2 years, and was feeling pretty cocky at that stage. This year's predictions were less than perfect (by some margin...), so I feel it's fair to say that I have now "reverted back to the mean". On reflection, this is how I fared (original prediction from January 2015 in black, actual outcome in red): Here we go: 1. I'll start with interest rates because this has a tangible affect on most people's lives. Mortgage holders wear the cost through higher mortgage repayments, and deposit holders reap the benefits through higher interest receipts. Interest rate movements also have a material impact on bond investments, which most of you are exposed to through Select Wealth Management. In NZ, our official cash rate starts the year at 3.5% – and I think it will end the year at about the same place. With a high NZ$ and historically low inflation (1% and with little indication that this is going to increase sharply), it's hard to find any reason to increase rates. At the same time the Reserve Bank has to balance this against the over-priced Auckland property market – a reason not to decrease the rate. So on balance, a "sit on our hands" approach seems likely. The wild card is if the Auckland property market corrects itself sharply, allowing the possibility for potential rate decreases – an unlikely scenario. We've gone from 3.5% to 2.5% – a decrease of a full percentage point. This may not sound like much, but in a low interest rate environment, it is a material move. Prediction 0 – Reality 1! 2. Next I'll look at currency. For years I've been saying that our currency will weaken against major trading partners, and last year it finally did (slightly). I believe that this is the start of a longer term trend, and that the NZ$ will continue to slide (albeit at a relatively slow rate) against the US$, AUS$ and British Pound. It is almost unanimously agreed by economists that the US$ is entering a long term strengthening cycle buoyed by a strengthening economy and likely interest rate hikes in the latter part of 2015. This presents an opportunity for NZ investors who hold investments domiciled in US$. The British pound is still at historically high levels and well above its long term average too, with little reason to remain there. The same can be said about the AUS$ – although a drop in their interest rates this year could slow the reversal. I believe that the only exceptions to the weakening NZ$ will be the Euro and the Japanese Yen, given that both these economies are likely to introduce significant monetary easing throughout the year (similar to what the USA did 5 years ago). So your European holiday may become more affordable later in the year... The US$ has fallen from 77 cents to 67 cents, the pound from 51P to 44P, and the AUS$ from 95 cents to 94 cents. I got the Euro and Yen wrong, as these also strengthened against the NZ$, but these 2 currencies have less influence on your returns than the US$, GBP and AUS$. Currencies are notoriously difficult to pick, so on balance I'll claim this one (given I got the important ones right...). Prediction 1 – Reality 1! 3. On a lighter note, I have to take a few punts on sport. World Cup Cricket returns to NZ for the first time since 1992 as we jointly host the tournament with Australia. The fact is that there are about 8 teams that are good enough to win the tournament – especially in the 50 overs format where any team could win on the day. But I think Australia will be hard to beat at home. I think that South Africa, New Zealand and Sri Lanka will be the other contenders. One thing I'm sure of is that it'll be a great event enjoyed by cricket enthusiasts around the world. And as for my beloved Phoenix – could this be the year we make a grand final.... This one is interesting. I got 3 of the 4 teams in the semi finals of the cricket right (that's worth a point), but then I forgot to mention the rugby (and that's getting close to a red card!). And as for my beloved Nix – I think I will always be susceptible to voting with my heart and not my head. All said and done, the RWC is too big an omission to forgive. Prediction 1 – Reality 2. 4. The oil price is an interesting one. It has fallen by more than half from over $100 to under $50 per barrel (although we haven't seen as big an impact at the pumps). This is quite a remarkable move, and it has been credited to lower global demand, increased production and a reduction in production cost thanks to technological advances in exploration and extraction. Apparently the break even cost for oil producers is around $70 – $80 per barrel, so it's hard to see the price remaining this artificially low for too long. Enjoy the lower petrol prices while they are here, but expect the cost to gradually increase over the course of the year. I'll take a stab and say $80 per barrel by the end of the year. I couldn't have been more wrong on this one. The price has continued to fall and a barrel of oil is now only $36 – less than half of what I had predicted! I think that margin of error is probably worth 2 points for reality! Mind you, of all the predictions I could have got entirely wrong, I'm pleased it's this one. The full effect of lower oil prices hasn't flowed through to the pump, but we are still under $2 a litre which is good for everyone. Prediction 1 – Reality 4. 5. Where does all of this leave the markets? I believe in a similar position to where they started 2014. At the time I suggested that a 7% return from broader share markets would be a good outcome (as it happens these expectations were exceeded). My starting point this year is that same 7% benchmark from broader share markets. Low interest rates around the world continue to support share markets as alternative investment options are few and far between. There also seem to be fewer visible risks on the horizon, and a genuine appetite from authorities to work together to stimulate growth. Global fixed interest markets will deliver little return to investors this year, and for several years to come as global interest rates slowly start to rise. The local fixed interest market should be more attractive. Failing a "black swan" event (for example a material act of terrorism) I believe we are in for another year of robust, consolidated performance. At the end of the day, this is the most important prediction which has the biggest impact on you and your returns. Returns were mixed with some share markets up strongly (New Zealand 11%, Japan and Germany 10%), some flat (America and Australia) and some marginally down (Hong Kong and London down 5%). The broadest measure of share markets is the MSCI all world composite index – an index that measures 46 different countries' share markets. By this measure, returns were flat for the year so I can't claim any points here. However, by the time you account for the outperformance from our fund managers, the value add research from JMIS, and the effect of our currency weakening, your Select Wealth Management returns have still been strong for the year and in line with my expectation. And that's all I really care about – making sure that your returns are good. So I don't mind conceding a point on a technicality here – we got the outcome we needed in the end! Prediction 1 – Reality 5. Let's hope I fare a bit better next year. Mind you, it'd be hard to do any worse... Here are the numbers for the past 30 days: |
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Well – that's that for the year. Thank you once again for your business in 2015 – we do not take it for granted and we really appreciate and value your custom. Wishing you and your loved ones a FANTASTIC Festive Season and I look forward to catching up in 2016. Warm regards The team at Isaacs Financial Planning dave@mifinancialplanning.co.nz |
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This newsletter is intended for general distribution and does not constitute personal financial advice. Copy of my primary disclosure statement and secondary disclosure statement.