Quarter Ending 30 September 2009

This past quarter ending 30 September 2009, has been one of the best for investor portfolios, probably since the early 1990’s.  Seldom do shares, fixed interest, and property securities perform well at the same time.  This quarter they did, however it was selective.

Listed New Zealand property companies have traditionally paid high dividends.  Unlike their Australian cousins, the New Zealand property companies in general carry lower levels of debt.  Most have had to refinance part of their debt over the past eighteen months or so, and some have raised additional capital.  Over a diversified spread of companies, a return of around 17% for the period would have been achievable. 

Share market returns have varied from market to market.  Australia has been more attractive than New Zealand.  Active managers appear to have out performed the market indices.  When looking at international shares, the benefit of full currency hedging appears to have been around 12% higher than for similar unhedged funds.

Fixed interest, especially amongst the listed New Zealand offerings, showed some valuation growth over and above the coupon (interest payments) rate.  This was to be expected with our economy moving out of recession and an easing of the financial markets.  We are in a low interest rate and low inflation rate environment.  There are also fewer bond issues coming to market, which has been positive for the secondary market.  There is still a huge market for investors who want income, and they now seem to accept that the income levels will be somewhat lower than the old typically 7.5 – 8% range that prevailed for a number of years.

The only real negative for portfolios this past quarter would be if they had exposure to hedge funds which in general have struggled.  The return contributions of cash will have also been very low for this quarter, thanks to our low cash interest rates.  Even so, cash rates are still possibly higher than the inflation rate before taking into account the impact of tax.

Some governments continue to use quantitative easing (printing money) to stimulate their economies.  The much feared inflationary impact of this has not materialised.  In theory quantitative easing is inflationary albeit relatively low, possibly around 1.5%.  This is roughly half the target inflation rate that reserve banks such as the RBNZ see as being in the acceptable range.  Given what has happened for example in the United States where they have slightly negative inflation (deflation) because of the impact of supply and demand, it could be argued that their quantitative easing has been beneficial for their economy.  That is, their economy would be in worse shape now, if there had not been the stimulus of the quantitative easing.

Low interest rates will encourage investment into growth assets, particularly shares.  Investors should not just go out and buy shares with abandon.  They should assess the risk to confirm that they are risk tolerant enough to move from a low risk strategy (say money in the bank), to a high risk strategy of being primarily invested in shares.

Knowing which shares or share funds, and which markets to buy, and when to sell them is the key to successful investing in shares.  The current taxation regime makes it advantageous for most New Zealand investors to use managed funds, rather than to buy and sell shares on their own account.  Investors should remember that past returns do not necessarily reflect future returns.