Investment Insight | Looking ahead
In September, we described how NZ Funds was successful in mitigating the downside as markets fell and capturing the upside as markets recovered. We also highlighted how growth-orientated and income-orientated investors were up strongly year to date versus the New Zealand share market. This situation continues, and despite the volatility in financial markets, clients’ portfolios are well positioned for what we believe will be a strong economic recovery.
In our view, this is only the beginning of a new bull market for shares. While the upward trajectory may pause as we navigate the United States and New Zealand elections, once the market digests these events, we believe the second phase of the market recovery will commence, driving growth assets higher.
Think long term - now is the time to invest
Those who invested funds in March and April are now sitting on a handsome capital gain as global share markets have rebounded strongly due to Government intervention. We believe a similar opportunity exists now, and for those with appropriate time horizons, this is the time to reinvest cash.
NZ Funds’ inflation and growth portfolios are positioned to take advantage of this opportunity. We believe these asset classes will offer significant upside over the next three years. This will be driven by continued Government and central bank intervention and low interest rates. In contrast, bonds will be capital stable at best while cash (including term deposits) will not be a good investment and could potentially lose 2.0% or more a year after taking inflation into account.
For those clients with long-term investment horizons, the best strategy is to look beyond the short term, ensure your asset allocation reflects your personal circumstances and use any market weakness to rebalance and invest. You can discuss these decisions with your financial adviser.
Industry outlook – structural changes
2020 has seen massive structural change in the economy and in our lives. The changes in the global economy are as dramatic as the structural changes resulting from the Great Depression, the1970s oil shocks and the changes to banking regulations following the 2008 Global Financial Crisis.
COVID -19 has created long-term commitments to low and, in some cases, negative interest rates. Low interest rates will allow heavily indebted countries to pay back debt and manage their economic recovery. However, low rates also put pressure on investors who require an income.
Over the last 20 years the average term deposit rate was 4.83% (before tax). The current 1-year term deposit is at 1.50% (before tax) and is poised to go lower.
Prior to 2020, it was viable for individuals to manage their own wealth via a selection of term deposits, bonds, property, and a share portfolio. However, saving and managing wealth for retirement is more than just earning a yield from term deposits and a capital gain from a handful of shares picked for you by a broker. This is no longer a viable way to manage wealth over the coming decade.
The prospect of increased inflation and low interest rates means that having money in cash and term deposits is as risky as leaving your money under the mattress. At the same time, bonds are no longer going to give you the capital stability and yield that they once did and selecting which shares to own has become increasingly difficult as valuations become stretched.
Looking ahead
In talking with our clients, we know many New Zealanders are becoming increasingly frustrated with the returns they are receiving from term deposits and are actively looking for higher risk and return options. While the share market does provide attractive long-term returns, large short-term declines in value, as occurred in 2008 and again in March 2020, can be very off-putting for investors.
NZ Funds is focused on building appropriately risk-managed financial infrastructure for all New Zealanders, allowing clients to move from a cash and term deposit dominated environment to a professionally managed, outcomes-based environment.
It is not just the underlying investments that are crucial to meet the needs of today’s investor. Many aspects of the infrastructure are important, for example, tax. The top PIE tax rate of 28% is lower than the top personal tax rate of 33%, which for many is the rate used to tax income from cash and term deposits. What’s more, a PIE may well buffer any further increases in personal tax rates as the Government searches for alternative ways to pay down debt.
Given the dramatic changes in the investment landscape brought upon by the events of 2020, NZ Funds is set to announce several new initiatives that we have developed. Alongside our partners, which include large global financial institutions, we are working hard to help you meet your investment goals. We look forward to communicating these new initiatives with you shortly.
In our view, this is only the beginning of a new bull market for shares. While the upward trajectory may pause as we navigate the United States and New Zealand elections, once the market digests these events, we believe the second phase of the market recovery will commence, driving growth assets higher.
Think long term - now is the time to invest
Those who invested funds in March and April are now sitting on a handsome capital gain as global share markets have rebounded strongly due to Government intervention. We believe a similar opportunity exists now, and for those with appropriate time horizons, this is the time to reinvest cash.
NZ Funds’ inflation and growth portfolios are positioned to take advantage of this opportunity. We believe these asset classes will offer significant upside over the next three years. This will be driven by continued Government and central bank intervention and low interest rates. In contrast, bonds will be capital stable at best while cash (including term deposits) will not be a good investment and could potentially lose 2.0% or more a year after taking inflation into account.
For those clients with long-term investment horizons, the best strategy is to look beyond the short term, ensure your asset allocation reflects your personal circumstances and use any market weakness to rebalance and invest. You can discuss these decisions with your financial adviser.
Industry outlook – structural changes
2020 has seen massive structural change in the economy and in our lives. The changes in the global economy are as dramatic as the structural changes resulting from the Great Depression, the1970s oil shocks and the changes to banking regulations following the 2008 Global Financial Crisis.
COVID -19 has created long-term commitments to low and, in some cases, negative interest rates. Low interest rates will allow heavily indebted countries to pay back debt and manage their economic recovery. However, low rates also put pressure on investors who require an income.
Over the last 20 years the average term deposit rate was 4.83% (before tax). The current 1-year term deposit is at 1.50% (before tax) and is poised to go lower.
Prior to 2020, it was viable for individuals to manage their own wealth via a selection of term deposits, bonds, property, and a share portfolio. However, saving and managing wealth for retirement is more than just earning a yield from term deposits and a capital gain from a handful of shares picked for you by a broker. This is no longer a viable way to manage wealth over the coming decade.
The prospect of increased inflation and low interest rates means that having money in cash and term deposits is as risky as leaving your money under the mattress. At the same time, bonds are no longer going to give you the capital stability and yield that they once did and selecting which shares to own has become increasingly difficult as valuations become stretched.
Looking ahead
In talking with our clients, we know many New Zealanders are becoming increasingly frustrated with the returns they are receiving from term deposits and are actively looking for higher risk and return options. While the share market does provide attractive long-term returns, large short-term declines in value, as occurred in 2008 and again in March 2020, can be very off-putting for investors.
NZ Funds is focused on building appropriately risk-managed financial infrastructure for all New Zealanders, allowing clients to move from a cash and term deposit dominated environment to a professionally managed, outcomes-based environment.
It is not just the underlying investments that are crucial to meet the needs of today’s investor. Many aspects of the infrastructure are important, for example, tax. The top PIE tax rate of 28% is lower than the top personal tax rate of 33%, which for many is the rate used to tax income from cash and term deposits. What’s more, a PIE may well buffer any further increases in personal tax rates as the Government searches for alternative ways to pay down debt.
Given the dramatic changes in the investment landscape brought upon by the events of 2020, NZ Funds is set to announce several new initiatives that we have developed. Alongside our partners, which include large global financial institutions, we are working hard to help you meet your investment goals. We look forward to communicating these new initiatives with you shortly.
Source: S&P NZX Call Rate Deposit Total Return Index, RBNZ data, NZ Funds calculations, S&P NZX Government Bond Index, S&P NZX 50 Portfolio Index, MSCI ACWI Net Return in USD.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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James Grigor is Chief Investment Officer for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. James' comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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