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C & D

What Has Happened in the Market Place?

At this time of year many people look back and think about what has been happening during the year. In the investment world it is also common practice. Economy wise, things have been ticking over pretty well in New Zealand. But there is an elephant in the room which could have serious implications over the next couple of years, particularly in the provincial centres. This of course, is the decline in dairy prices.

When we look at the Dairy Prices Graph, prices have fallen a long way this year. But were people all gloom and doom in 2012 when prices were at a similar level? These prices invariably fluctuate and can change quite dramatically in a short period of time. What we haven’t seen yet is a bounce back. So for the domestic economy it would be really good if there were to be significant increases in dairy prices. If there aren’t, then our economy will be more subdued than it has been over the past couple of years.

When it comes to shares, New Zealand has been a better place to invest than Australia over the past year. The Price to Earnings ratio (PE) of New Zealand shares are currently about 5% higher than Australia. There is normally a tendency to revert to the mean over time. It is not really a question of if, it is a question of when this will happen.

One of the real unknowns is the impact of KiwiSaver which provides strong inflows into the New Zealand share market. This in itself could effectively change the normal PE range for New Zealand shares.

Forward projections would indicate a significantly higher investment return for Australian shares over the next ten years than New Zealand shares. We are seeing increasing weightings to Australian shares in the portfolios of Fund Managers who offer Australasian Funds.

In the International share space, we see a similar pattern. Returns from United States shares have been better than European, so on a forward looking basis European shares should outperform United States shares over a ten year period.

Over the past few years, much of the difference in individual International Share fund performance between funds is explained by the hedging policy of the fund. Despite a high New Zealand dollar, it has been really advantageous to be fully hedged.

When looking to invest it pays not to buy expensive assets. When markets are at highs, it pays to take some profits and reinvest into better value markets. You should also only take on the amount of market risk that you can financially and emotionally cope with.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.