| Welcome to the September Issue of the Dashboard Newsletter. Spring is here, and suddenly we find ourselves on the home stretch to Christmas...
There's been lots of action in the financial markets over the past month. After a prolonged period of very low volatility, the past month has seen some big moves in most markets. Locally, our market (the NZX50) fell by 2.6% on Monday – the biggest one day fall since 2011. (Bear in mind that we are still up over 15% for the year to date though). There were similar moves across many of the other markets too – the first time we have seen these big daily moves for a very long time. Most of this volatility has been driven by the uncertainty of what the US Federal Reserve is going to do with interest rates at their next meeting on 21 September. Every time some data comes out that indicates a rate hike, or a FMOC committee member makes a public statement about a potential rate hike, the markets react negatively. I find this fascinating. The fact is that rates will increase – and the markets know this. Whether it's in September, or in December or even March 2017, it is inevitable that it will happen. So there is no reason why the market should be so sensitive to the exact timing of this hike – a few months difference will not change the fundamental long term outcome. My view is that a rate hike is actually a positive thing – it's a signal that the US economy is strong and that the Federal Reserve no longer sees a need to aggressively underpin growth. This "normalisation" is healthy – even though it will no doubt create some volatility along the way. From a New Zealand perspective, a US rate hike is probably the only mechanism that will weaken our dollar too – which would be a great benefit for any investment you hold in foreign currency. In New Zealand, our Reserve Bank meets on 22 September to review our Official Cash Rate (only a day after the US Fed meeting). It currently sits at 2%, and expectation is that it will fall even further to a new record low of 1.75% – so we are moving in the opposite direction of the US rate. This creates an environment where the NZ$ / US$ cross rate could experience some sharp moves. An increase in US rates combined with a decrease in NZ rates would be a "double whammy". Graeme Wheeler will have the benefit of seeing what the Fed does before he announces his decision, but I don't think it will influence his outcome. I'm not usually a betting man, but I'll take a stab and make a prediction. I think the Fed will leave rates unchanged but signal very clearly that it will hike in December. Graeme on the other hand will cut to 1.75%. The end result – business as usual... The other major talking point over the past month has been the average house price. QV now suggests that your average home in Auckland is worth over $1 million. The national average also crossed a major threshold, jumping past $600,000 for the first time to $612,527. Interestingly, the Real Estate Institute of New Zealand (REINZ) have very different numbers, with their Auckland average at $842,500 and National average at $492,000. Whichever way you look at it, these are very big numbers. A recent report from the International Monetary Fund (IMF) ranked New Zealand as the worst country of those it surveyed for housing affordability – a measure of average house price versus average income. This means our young people are all but giving up on the dream of owning their own home. This has become a major political issue, with parties pointing fingers as to whose fault it is and what needs doing. The fact is that this is a problem that can't be solved in a hurry – it will take years, perhaps even decades for this rebalance. Low interest rates are masking the problem for the time being, but at some point this will change and the chickens will come home to roost. Either our incomes need to increase sharply, or house prices have to stagnate until our incomes catch up. Looking at the numbers, they are relatively muted over the past month despite a lot of "noise". Most markets are down – but not too sharply (between 1.5% and 4%). Hong Kong is the outlier up 2%. Our currency remains strong – particularly against the AUS$ (up 3% over the past month). So now looks like a good time to buy your foreign currency if you have any overseas trips planned in the next 12 months. Something that was a really hot topic a while ago but hasn't been mentioned in some time is dairy prices. After a long period of dairy price weakness, farmers will be smiling again as the last 3 dairy auctions saw very strong increases in prices across the board – great for New Zealand's economy. Here are the numbers: |
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I'll finish with a quick look at ethical investing. You may have heard some of the negative publicity around some KiwiSaver providers who were investing in companies that produce cluster bombs. I had a client contact me and enquire about this and if Select Wealth Management had any exposures like this. This is part of my response: Ethical investing is a very tricky subject. This was actually one of our major agenda items at our most recent quarterly review with our researchers recently. The conclusion from our discussion was that it is difficult to absolutely define ethical investing. There are some obvious definitions – cluster bombs or illegal activity – but there are also some very grey areas. As an example, we had one committee member who refused to invest in Sky City because of the gambling component to their business, yet others did not consider this worthy of being caught in an ethical filter. Another didn't like alcohol, which ironically was fine with the anti-gambler (he was a wine enthusiast). One didn't like banks, as he believed that they often acted unethically. Some even argued that drug companies (medical drugs that is) weren't always acting ethically either. So where do you draw the line? The cluster bomb issue arose as a result of a passive EFT (electronically traded fund). These are funds that do not have any active management from human beings – they are simply computer program algorithms that mimic an entire market or index (for example the S&P500 or the NZX50). So whatever companies make up this index at any given time, the algorithm buys and mimics. Investors typically use these fund options as the management fees are very low. One of the biggest ETF managers is Vangaurd, and it was a Vangaurd fund that was caught up in the KiwiSaver cluster bomb issue. This is a low cost global share fund that holds over 5,000 holdings in companies around the world at any one time. These holdings change daily as companies drop in and out of various market indexes across the world (usually as a result of the size of the company). One of the companies in the fund had a subsidiary that invested in a company that developed cluster bombs. Clearly this is unacceptable – and potentially even illegal in New Zealand. However, it is easy to see how it could happen. It is reasonable to assume that actively managed funds would be far less likely to find themselves in a similar position. Most active managers (whether they are promoted as ethical or not) have filters in their investment selection process that would ensure that such companies are avoided. In fact, because there is a movement towards ethical investment in general, most active fund managers have a natural bias towards ethical companies – after all, these are the companies of the future that offer potentially better returns. Our objective at Isaacs Financial Planning is to deliver the best possible outcome to our clients, and we believe that by default this will come about from active managers (who we believe would avoid obviously unethical investments). Select Wealth Management have a similar approach, but are also looking to expand the available options that are labelled "ethical". Whilst we use EFT's from time to time, we have a relatively small exposure to these at this stage, and we do not believe that these hold any obviously unethical investments. If you want to discuss your portfolio in more detail with respect to ethical investments, please feel free to contact me – I am here to help. Finally, a quick update on our Giving Back campaign. As you may recall, we are supporting Olympic swimmer Emma Robinson for the second half of 2016. I caught up with Emma recently when she came home to New Zealand for a few days holiday after the Olympics. Whilst she didn't have the best race in Rio and was a bit disappointed with her swim, she had a fantastic time and said that the experience is unlike anything she has ever had. Emma is now super motivated to do even better in 4 years' time, and is back in training ready to do it all again. Well done Emma – we are super proud of you!!! Thank you for all the referrals over the past month – I really appreciate it. Thanks to your support and referrals, Emma's giving back account is coming on nicely and we are in fact slightly ahead of target. Check out our progress at mifinancialplanning.co.nz/giving-back Until next time, keep well. 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.