2009 in Review

As we write this, the year has all but finished, with markets gearing up for the Christmas New Year break. In New Zealand and Australia there is normally a virtual shut down, however the USA and European markets do not slow up as much. Their hiatus is in the July/August period.

The year got off to a very poor start with sharemarkets declining further. A significant change in people’s perception of risk occurred and there was a massive turnaround in performance for shares. Last year’s losers were this year’s winners.

The second quarter of the year was very productive for shares, with returns being similar for Australasian and International shares. The third quarter was very good for Australasian shares and still pretty reasonable for International. The returns for this final quarter have slowed down a lot.

The key for investors was not to try and time the market. Nor was it to be invested in index hugging funds. There was a major variation in returns between managers in the same sector.

Many economies faced their weakest performance since World War II. Policy makers frantically tried to unclog the financial pipes and get businesses moving again. Central banks focused on slashing interest rates. Some bought government bonds, corporate bonds and other securities. In effect they were printing money, or as they prefer to say, they were using quantitative easing.

By March, economic indicators had stopped plunging and some began to rise. Share market price earning ratios were now down to single digits, providing investors with an opportunity to buy in at very low prices. This caused the markets to surge upwards, and economic indicators gradually began to confirm that the worst was over.

While New Zealand couldn’t escape the impact of the global financial crisis, it suffered relatively mild symptoms compared to most other countries. Our recession was mild. We were saved by our dollar plunging through to March, and our close trading relationships with Australia and China. We also had a robust banking system.

Investments that were hammered in 2008, tended to perform well in 2009. These included Australasian shares, International shares, and Global listed property. NZ listed property also performed reasonably well, supported by high dividend yields. The worst performing asset class was direct NZ property.

The economic outlook for 2010 is somewhat mixed. Parts of Europe, especially Greece, Spain and the UK continue in a precarious state. Similarly, the new European nations also have problems. An added problem for some European Union members, is that they have a common currency. This limits the options a country has to stimulate its economy. In some ways it is fortunate for Great Britain that they did not adopt the Euro. This has provided them with the ability to adjust interest rates and also to use quantitative easing to increase the money supply to stimulate their economy. It may take years for their economy to become buoyant.

Investors should be very choosy about what to invest in. The quality of the underlying investments is paramount. The road ahead will not be smooth; however there will be plenty of opportunities. Given the investment returns that there has been this past year, it is likely that the returns for 2010 will be lower. But they will most likely be more attractive than bank interest rates, unless interest rates rise dramatically during the course of the year.