| Welcome to the final issue of the Select Wealth Management Dashboard Newsletter for 2022.
What a year! So much to reflect on. It certainly felt like a year of firsts in many respects. The United Kingdom had a particularly challenging year. They lost their long serving beloved Queen. At the same time, they had the shortest ever serving Prime Minister (Liz Truss) resigning after only 7 weeks at the helm. She was replaced by Rishi Sunak - the first ever person of colour to head the British government. In the USA, for the first time ever more people now report smoking marijuana than cigarettes (according to a Gallop report released in August). Apple became the first company ever to be worth US$3 trillion (although it has fallen in value since), and Meta (FaceBook) records it's first ever drop in quarterly revenue since it listed in 2012. New Zealand host the Woman's Rugby World Cup for the first time ever, and celebrate the occasion with the White Ferns retaining their title (making them 6 times world champions now). Transmission Gully opens!!! It did - it actually opened. And what an improvement that has made - just fantastic. From an investment perspective, 2022 is the first year ever where both share markets and bond markets fell in value by more than 10% together. In fact, it was the worst year in history for global bond markets. It really has been a very challenging year. December is always a month of reflection for me. Part of that is reflecting on the predictions I made in January. This is usually a humiliating exercise, and a firm reminder of why I don't swing for the fences with my investment approach based on forecasts (either mine or anyone else's). After decades of observation, I have come to realise the truth to the saying that "forecasting is very difficult, especially when it involves the future...". My average score over the past decade is about 50% (right half the time, wrong half the time). Let's see how I go this year - predictions from January in black, actual outcome in red. Prediction 1 - Interest rates: I'll ease my way in this year by starting with interest rates. The OCR (Official Cash Rate) in New Zealand starts the year at 0.75%, and the FED rate in the USA starts the year at 0.25%. I predict that there will be 2 x 0.25% rate increases in New Zealand by the end of the year (taking the rate to 1.25%), and 3 x 0.25% rate increases in the USA (taking their rate to 1.00%). The biggest impact this has for most people is the effect that has on mortgage rates. At the moment, you can secure a 1 year mortgage rate of about 3.65% (assuming you have 20% equity). If I'm right about the OCR, expect this same 1 year mortgage rate to be closer to 4.25% by the end of the year. If only I had got this one right. I picked the direction, but I was way off with the magnitude. The OCR in New Zealand is currently 4.75%, and the FED rate in the USA is currently 4.40%. I don't think any economist was brave enough to call moves like this at the beginning of the year. The New Zealand OCR had several increases of 0.50%, and most recently had an increase of 0.75% in November - the first time ever such a large increase has been implemented. Spare a thought for those mortgage holders. That 1 year rate of 4.25% I predicted is in fact more like 6.55%. Unfortunately this is going to cause some real pain to some real people when their mortgage rates roll over in 2023... All said and done, even though I picked the direction, I don't feel that I deserve any points on this one... Prediction 0 - Reality 1 Prediction 2 - Housing market: If you owned a property in 2021, your wealth will have grown materially. The average house price in New Zealand increased by nearly 25% during the year, and currently stands at $1,006,632 (according to propertyvalue.co.nz). But I think 2022 is going to be a lot more challenging for the property market. Mortgage rates went up sharply in 2021, and are likely to go up a bit more in 2022 (if I have prediction 1 correct). Reserve Bank data suggests that there is $210 billion worth of mortgage debt due to roll off fixed rates this year. All of that will need to be refixed at materially higher rates. Add to the mix the fact that lending criteria for banks are far more restrictive now (amendments to the Credit Contracts and Consumer Finance Act, new LVR restrictions and potentially new Debt to Income ratios), and I think there are headwinds for property. I imagine values finish the year more or less where they started, or perhaps slightly below - something in the region of 0% to -5%. Once again, if only I got this one right. Same as prediction 1, I picked the direction, but not the magnitude. According to www.propertyvalue.co.nz, house prices nationwide are down 4.3% year to date - but I find this very difficult to reconcile. Anecdotally, it seems widely accepted that house prices are down something in the region of 10% to 20% - depending on where it is. Consensus seems to be that greater Wellington is down about 15% (and this is definitely what I have mentally accounted for with my personal property). In fact, this article from earlier this week has Wellington properties down 20.8% over the past year. If you own a property, you are best placed to know how its value has changed. But for the purpose of this exercise, I'm going to claim ½ a point for getting the direction right (it's a big call betting against housing), but give reality ½ a point given I missed the magnitude. Prediction ½ - Reality 1½ Prediction 3 - Bitcoin: I'll be the first to admit - I don't know what Bitcoin is. I don't understand it, and I don't invest in it. So it seems crazy to even be commenting about it. The price of a Bitcoin is currently US$42,692, and depending on whose forecast you read, it could be anything from US$25,000 to US$110,000 by the end of the year. I'm not going to even hazard a guess as to where in that range it lands. But I will say this - at the moment, El Salvador is the only country in the world where Bitcoin is legal tender. I predict that by the end of 2022, there will be at least 1 other country to adopt Bitcoin as legal tender too. I'm really glad I didn't take a stab at the price on this one. The price of Bitcoin is currently US$17,803 - well outside of the already very wide range of US$25,000 to US$110,000. I still don't understand it, but it seems to me that we are reaching an infliction point with Bitcoin. Earlier this month, officials at the European Central Bank said that "the recent stabilisation of the Bitcoin price was likely an artificially induced last gasp before the road to irrelevance" - a fairly clear indication of their opinion on the matter. However, I will claim a point on this because earlier this year the Central African Republic (population 4.9 million), became the second ever country to adopt Bitcoin as legal tender (alongside their CFA Franc). Prediction 1½ - Reality 1½ Prediction 4 - Sport: There are some significant sporting events in 2022 - the Winter Olympics, Woman's Cricket World Cup, Commonwealth Games, and of course my beloved Phoenix winning their first ever A-League title (I live in hope). But the most significant sports event of the year is the FIFA World Cup in Qatar. Can France defend their title? Can England break their 56 year drought? Will Brazil or Argentina do it for South America. It's anyone's guess this year - particularly given that there is always a chance that Covid throws in a curve ball and results in a few key players missing out unexpectedly... But I'll take a stab and say either France or Brazil lift the trophy this year. After much discourse about Qater as a venue, the world cup got underway and on the surface of it seems to have been a very well run event. I certainly enjoyed it - it really is an amazing tournament! We'll only find out the eventual winner on Monday, but France is in the final, so I'm claiming half a point on this one. Although, I must be honest - an Argentinian victory including a goal from Messi in his last ever world cup would seem fitting... Prediction 2 - Reality 1½ Prediction 5 - Space travel: I've always been intrigued by the vastness of space and the opportunities this presents. I also marvel at how advanced space travel has become in recent times - I mean we're planning on sending humans to Mars this decade! In doing my research for writing this newsletter, I read this survey from Ipsos where 14% of respondents expected aliens to visit earth in 2022... I'm not quite that sold on the space thing, but I do have a prediction. With the Space Tourism race heating up, I predict that there will be more civilian fare-paying space travellers in 2022, than official astronauts. OK - this one is a bit murky, because the rules for who qualifies as an "Astronaut" keep changing. Finding good data about the whse been to space is also difficult. But according to parabolicarc.com, 32 people flew into space in the first 8 months of 2022. This included 14 Astronauts, and 18 "Spaceflight Participants". However, it is unclear how many of the spaceflight participants paid for their trip (as opposed to being employed and doing this as their job). There were several that did pay, including 3 tickets for a week long stay on the International Space Station. The tag price for these tickets was US$55 million each! On balance, I'm going to claim a point on this one. The point I am trying to highlight here is the fact that space travel is becoming more common, and will soon be accessible to the public (the price tag for a trip on Richard Branson's Virgin Galactic is now down to US$450,000...). Prediction 3 - Reality 1½ Prediction 6 - Investment Style: A few years ago, the big debate was which investment style was superior - more expensive Active Investment Management (funds that employ people to make active stock picking choices), or low cost Passive Investment Management (funds that use algorithms to mimic certain indexes, e.g. the S&P500 or NZX50). Opinions were divided, and the debate was never categorically settled. Personally, I have always felt like there is room for both - some years, an Active style will outperform, other years the Passive style will prevail. My prediction for 2022 though, is that good Active Managers will outperform their Passive counterparts. My rationale for this is because I think there is going to be a lot of volatility in markets this year, and this should favour Active managers. To measure this, I'll use some funds (that are comparable in all aspects except the active vs passive style) as benchmarks. The matchups will be:
These results show exactly why we have a combination of both active and passive investment managers in our portfolios. Half the active managers out-performed (Devon, Magellan and Russell), but the other half under-performed (Castle Point, Milford and Nikko). Interestingly, if you did this comparison 12 months ago, the result would be exactly the opposite - Devon, Magellan and Russell underperformed, and Castle Point, Milford and Nikko out-performed. Can we call this points shared? Prediction 3½ - Reality 2 Prediction 7 - Markets: Share markets go up, and share markets go down - we just don't know in which order. I believe that this year they will go up and down throughout the year- a lot. I.e., I think there will be volatility this year. There will be a lot of headlines that will scare and excite investors - interest rate hikes, Covid developments (good and bad), midterm elections in the USA, tensions between China and Taiwan, Russia and Ukraine. So lots for the markets to consider. I also think that there will be material divergence between various markets - some will do well, others not so. But once the dust has settled, I believe we'll see modest share market growth in aggregate - something in the region of 0% to 5%. To measure this, let's take the value of 5 markets as at 1 January 2022, and see where they finish at the end of the year:
I called the fact that there would be extreme volatility and divergence between markets, but I can't claim any points on this one. Sadly, we are a long way off the 0 - 5% I suggested. Prediction 3½ - Reality 3 So there you have it - another year of very mediocre predictions. It's a painful exercise scoring your predictions like this, but it is a very good mechanism to keep your feet firmly planted on the ground, and ensure you retain a healthy dose of humility. Here are the numbers for the past 30 days: |
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Given the very challenging environment over the past year, our Giving Back program for Kaibosh hasn't been as successful as we would have liked. However, I am pleased to confirm that we will be donating $1,401 to this fantastic cause. Thank you for your support over the year, and for the introduction to your family and friends to our business. We really do appreciate it. To keep track of the Giving Back program visit https://mifinancialplanning.co.nz/giving-back.html We have a very exciting new campaign lined up for next year - one that I feel very strongly about. I'll give you all the details in January's newsletter. In closing, I want to thank you for your support and custom in 2022. It is a privilege to work with you, and something that we do not take for granted. I look forward to seeing you again in 2023. In the meantime, have a fantastic Festive Season, a wonderful Christmas, and hopefully you get to enjoy some down time with family, friends and loved ones. Warm regards Dave and the team at Makowem & 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.