| Welcome to the final issue of the Select Wealth Management Dashboard Newsletter for 2018. As is customary, this issue will reflect on the predictions that I made 12 months ago in January. This usually results in a great opportunity for you to point and laugh and say “WOW – he was way off!!!”. Let’s see how I got on this year. Predictions in January in black, and actual outcomes in red below:
1. I’ll start with something that dominated the financial headlines in 2017, and that I think will do the same again in 2018 – Bitcoin. Bitcoin is the crypto-currency that has exploded in value over the past 12 months. By exploded, I mean that it went from US$891 per coin in Jan 2017 to US$16,800 per coin now. I’d be lying if I said that I fully understand the value of Bitcoin (I’m not sure anyone really does), but I think this year will be a critical year for its future. Bitcoin has attracted the interest of markets, the public and now the law makers. Central Banks and Governments around the world are grappling with how to deal with this. They may regulate or even potentially ban it. I expect that 2018 will see this bubble burst, and that the value falls significantly by year’s end. I can safely claim this one. The value of Bitcoin got as high as $19,900 per coin at its peak, but today stands at $3,294. That’s a fall in value of 83%. It’s true that a reasonable amount of people made millions in Bitcoin, but that’s mainly because millions of people lost a reasonable amount in Bitcoin. That’s typically the characteristic of a pyramid scheme. I wouldn’t go so far as to say that Bitcoin is a pyramid scheme (yet), but I will say that I am a long way away from believing that this will become a mainstream currency of the future. I continue to watch with interest, but in the meantime I’ll claim a point on this one. Prediction – 1 : Reality – 0. 2. I predict that 2018 will see some more prominent headlines about Brexit again. Brexit dominated world headlines for months immediately after it occurred in June 2016, but then went quiet during 2017 as the mechanics of it slowly got under way. 2018 will see negotiations heat up and the winners and losers will become clearer. I still believe that there will be some pain here, and the losers (whoever they may be) will make some noise about it. Brexit has dominated UK politics and media for the second half of 2018, and probably will continue to do so for 2019. Prime Minister Teresa May has negotiated what she calls “the best deal possible” with the EU, but this has little support from the House of Commons and is unlikely to be accepted. There is very little certainty on the way forward with murmurings of a new referendum getting louder. The issue continues to divide the Nation – another point for predictions. Prediction – 2 : Reality – 0. 3. Inflation is an interesting one for me. The most current inflation reading for New Zealand is 1.9% per annum (September 2017). This is historically low, with the average since 2000 being 2.4% per annum, and the average between 1970 and 1990 as high as 11% per annum. Economists the world over have been grappling with why inflation hasn’t increased in recent times (particularly given that we are at record low interest rates which usually stimulates inflation). But my view is that inflation will remain low for a while longer yet. This is because I believe that technology is forcing prices down. There are so many examples where technology has a direct impact on consumption or price. Think of services like Air B&B which has driven down the cost of holiday accommodation, Uber with Taxi fares, or Netflix with the cost of subscription TV. Cars are much more fuel efficient so the demand for petrol has fallen. TradeMe means that people recycle and buy cheaper second hand goods (as opposed to new goods). Online shopping in general has driven down the cost of most consumer goods – in particular clothing. So I think low inflation is here for a while longer. Look for a similar number (1.9%) by the end of the year. I’m on fire this year – I’ll claim this one too. The most recent CPI reading for the year finished at 1.9%. Prediction – 3 : Reality – 0. 4. That leads nicely into interest rates. Interest rates the world over are off their lows of the past few years, but still relatively low compared to long term averages. The New Zealand Official Cash Rate spent the whole of 2017 at 1.75%, while the FED rate in America moved from 0.50% to 1.25%. I imagine that the “normalisation” process in America will continue, and this rate will increase to about 2% by the end of the year (representing 3 rate hikes of 0.25% each). However, I can’t see much movement in New Zealand’s OCR – perhaps 1 increase leaving us at 2% also. I’m going to share the points on this one because I was pretty close but not exactly right. The NZ official cash rate actually remained unchanged throughout the year and is still 1.75%, meaning it now hasn’t changed for over 2 years. America on the other hand has had 3 rate increases this year and currently sits at 2% (although there is one FED meeting left this year still). No major surprises on either front here… Prediction – 4 : Reality – 1. 5. I’ve said it before, I’ll say it again. I think the NZ$ will weaken (modestly) against major trading partners over the next 12 months – the exception being the British Pound which could go anywhere (refer Brexit). Most notably, I’ll take a stab with a prediction of 67 cents against the US$ by years’ end (currently at 72 cents). The NZ$ did weaken against the US$. It got as low as 65 cents in October, but currently sits at 68.5 cents (not too far off my 67 cents stab). The pound has been a bit more volatile – it got as low as 0.49 pence in October, but now up to 0.54 pence. That’s a move of 10% in 2 months! Refer Brexit… Once again, I’ll claim this one. Prediction – 5 : Reality – 1. 6. I can’t not make a mention of Trump… His Tax Reform Bill was signed into law on 22 December 2017 and is due to be enacted in February this year. It will see the corporate tax rate slashed from 35% to 21%. The rational is that the lower corporate tax rate will make America competitive relative to other countries and repatriate many companies (particularly manufacturing and services) back to America. Supports of the reform argue that this will create enough growth (and in turn more tax) to more than pay for itself. Detractors argue that the loss in tax revenue will see American debt increase by up to $2 trillion over the next 10 years. Time will tell who’s got it right. Either way, it’s a pretty bold role of the dice by Trump. This could either be the jewel in his crown of “Make America Great Again”, or a nail in his coffin. I doubt we will know definitely which it is by the end of 2018, but we might have some indication by then. It is a bit early to know if this has worked or not. The tax filings for March 2019 will be the first to reflect the tax reforms, so companies will feel the full benefit then. Individuals have already had some small benefit (as their wages immediately reflected new tax treatment and many companies were forced to pay low wage earners bonuses as part of the tax reform). But the more important issue is how do these reforms affect America in the longer term (10 years). Time will tell. For now, we’ll call this one a draw and award no points… Prediction – 5 : Reality – 1. 7. My sporting prediction for the year – football world cup in Russia. Watch out for Germany and Spain. In terms of my beloved Phoenix, everyone has written them off this year (as had I a month ago). But I have this funny feeling in my waters. I think they may just pull a rabbit out of the hat and qualify for the play-offs this year – against all expectation. This is a great example of how emotions can cloud judgement. Never bet with your heart! My beloved Phoenix got nowhere near the play-offs, nor did Spain or Germany get near the final. I should have points deducted for this one! Prediction – 5 : Reality – 2. 8. Finally a prediction on the markets. Fact – “markets go up, and markets go down. We just don’t know in which order”. What we do know is that markets have been going up for a long time now, and every year that they go up means that they are 1 year closer to going down. That being said, I don’t believe that 2018 will be the year that they go down. I think that we will see a correction of more than 10% at some point during the year, but we will still end the year modestly ahead of where we started. Well – what a ride 2018 has been. I got the call correct in terms of the markets falling by more than 10%. In fact, this happened twice this year – once in February and again in October. Overall, results were mixed across various share markets though. With just a few trading days left for the year, Europe and Asia are down significantly for the year. The London and German share markets are down 11% and 18% respectively, and Hong Kong and Japan 14% and 8% respectively. These are big falls in anyone’s language. We fared better down under with Australia down 8%, and New Zealand actually up 4%. America’s Dow Jones and S&P500 are slightly down (3%), but the Nasdaq has managed to eke out a small gain. All said and done, it’s fair to say that if you had exposure to all of these share markets, on aggregate you would be down for the year. I’ll have to concede on this one and can’t claim any points here. Prediction – 5 : Reality – 3. So a 5 / 3 result this year in favour of predictions. It seems a bit of a hollow victory somehow – given the disappointing share market performance. I would far rather get none of the predictions accurate and see investment portfolios grow by 10% for the year. Alas – not to be. In saying that, I have been very pleased with how the bulk of our portfolios have held up under market stress. For the most part, conservative portfolios have avoided any capital loss, balanced portfolios have more or less broken even, and growth portfolios have fallen in value far less than the broader markets. It might seem odd to say this when performance has been poor for the past year, but our portfolios have actually done exceptionally well over the past 12 months. It’s easy to make money when markets are going up. It’s far more difficult to avoid losing money when markets are falling. This is testament to the great work from our researchers JMI Wealth, and the fund managers we have exposure to. Here are the numbers for the past 30 days: |
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Finally, an update on our Giving Back Program. As you know, we have just completed a very successful campaign with Te Omanga Hospice to help them fund the re-build of their inpatient facility on Woburn Road. I am very pleased and proud to report that thanks to all your support and referrals, we were able to donate $2,675 to the cause. Thank you so much for all your support and referrals to make this possible. For the first 6 months of 2019, we have decided to work with an individual again (as opposed to an organisation). I’ll tell you all about it in January. Thanks for taking the time to read this (rather lengthy) edition of our newsletter. All that’s left for me to do is to say thank you for your custom over 2018. We do not take your business for granted and appreciate your continued support. Wishing you and your loved ones a fantastic Festive Season and a magical New Year! I look forward to seeing you in 2019. Warm regards Dave and 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.