Hop on board
I know that Easter has come and gone, but if supermarkets are still selling Christmas mince pies (yes, it's a fact) then I'm going to write about the Easter bunny! Actually strictly speaking it may not be the Easter bunny as it has been hopping around for more than three months. But regardless, it makes a pleasant change from talking bulls and bears.
Last month Jim Paulsen, strategist at Wells Capital Management, introduced the idea that we are in a bunny market and we're set to stay in it for some time. Unlike an enthusiastic bull which spikes the market higher, or a scary bear that claws the market down, a bunny market simply hops around and never really gets anywhere.
As frustrated investors around the world can attest, the first three months of this year have featured a lot of hopping, yet markets have failed to move very far from the closing levels of last year. Most of the major markets have traded in a range of 10-15% over the last three months, but will finish the March quarter in pretty much the same place as they started the year.
The bunny market is not a new phenomenon, though we haven't had a proper one since the mid-1990s when the Federal Reserve began tightening monetary policy.
According to Paulsen, bunny markets typically occur in the latter stages of an economic recovery. "Stocks initially recover aggressively after a recession. However, as the recovery matures, cost pressures, inflation and higher interest rates begin to put pressure on the bull market. This often resolves into a bunny market for the balance of many economic recoveries."
That sounds about right. We've seen stocks rally strongly since March 2009, and although we have yet to see inflation or higher interest rates, markets have largely run out of puff. The economic recovery is continuing, and despite occasional headlines to the contrary, there is no evidence that it is about to end.
It appears that the bulls and the bears have simply been replaced with a different animal.
The bulls have been displaced because the company earnings cycle is mature (without decent revenue growth, earnings cannot grow significantly) and stocks are relatively expensive, so even the most optimistic bull has had to pull his horns in. The bears have had to return to their caves because with low recession risk and continued economic recovery, there is no room for a sustained bear market. That leaves us with the bunny — no significant market declines or rallies, just a lot of hopping.
As frustrating as flat bunny markets are, they can be the very best sort of market for long-term regular savers. Although the starting and ending prices of the last quarter suggest that little money has been made, a saver who has been investing regularly throughout the period has had continuous opportunities to buy at similar price levels, with an occasional bargain price thrown in. Anyone who invests on a regular basis has a chance to obtain a better long-term average entry price, compared to those investors who try to pick a single entry point in a bull or bear market.
What Paulsen does highlight — and we think he has a point — is that in a bunny market, investment strategies can no longer be simply bullish or bearish. Buy and hold strategies may not be as successful on their own — it might pay to top up after periods of significant weakness and trim holdings after solid runs. And prudent stock-picking will likely add value — after all, the bunny is going to hop all over the place, benefiting certain businesses and industries over others.
Don't worry — we've got this bunny sorted on your behalf. We'll make sure your returns are eggstra-special!
Managing Director | Fisher Funds
Highlights and Lowlights
- In New Zealand, Restaurant Brands made a major acquisition in Australia during the month with the purchase of 42 KFC stores spread throughout New South Wales on what we believe to be favourable terms. Its New Zealand operations continue to perform well with same stores sales for the last year up 5.3%. The Restaurant Brands share price was up over 15% for the month. Auckland Airport continues to have strong passenger throughput with international passenger numbers up 10.5% in February and its domestic terminal had its busiest month ever with an 18.6% increase. Qatar is the latest airline to announce direct flights to New Zealand. In a month where the broader market was up over 8% it is difficult to find any lowlights. NZX had been trying to purchase NZ Clear (a clearing and settlement system) from the Reserve Bank, but the Bank has decided not to proceed with a sale. This purchase would have given NZX some synergies with its own clearing system.
- Our Australian part of the portfolio delivered a solid return for the month but lagged a buoyant market led north by the resources sector which we don't have exposure to. Toxfree Solutions rallied strongly after announcing the acquisition of a valuable waste disposal business in New South Wales, which is expected to boost earnings in years to come. Medibank had a strong run on the appointment of the reputable Craig Drummond as CEO. Drummond is viewed as having been critical to NAB's successful restructuring and investors look forward to a repeat of his success at the Medibank helm. Disappointingly, the portfolio's largest position, Ramsay Healthcare, was weak as the outlook for its French subsidiary suffered when regulators cut prices paid to private hospitals.
- After a torrid start to the year global share markets rebounded strongly in March although some of the gloss was taken off for New Zealand investors by a strengthening kiwi dollar tempering returns on international investments. The US share market, as measured by the Dow Jones Index, reached highs last seen in early December 2015 propelled by better than expected reports on jobs and manufacturing and confirmation from the Federal Reserve that interest rate hikes will be more modest than previously signaled. Your international portfolio lagged its benchmark slightly with the holdings in the information technology and materials sectors the main detractors.
- Fixed interest markets were buoyed by the Bank of Japan and European Central Bank delivering new stimulus packages that exceeded market expectations. This caused prices of most financial assets to rise, with both government and corporate bonds participating strongly in the rally. While European bank bonds posted a strong performance in March, our holdings in equivalent bonds issued by their U.K. peers lagged. We believe the primary reason for this underperformance was the growing uncertainty surrounding the upcoming vote on Britain leaving the Eurozone. While these "BREXIT" concerns are expected to linger until the vote on June 23rd we remain positively disposed to these banks given their strong financial positions and favourable economic backdrop, regardless of the outcome of the vote.
Your KiwiSaver portfolios
Fonterra — a non-farmer shareholders’ conundrum
By Murray Brown, Senior Portfolio Manager, New Zealand
The share price of the Fonterra Shareholders' Fund today is languishing below the price it first listed at in November 2012, despite a strong New Zealand share market over this period.
We believe that part of this underperformance can be explained by the challenges the Fund has in balancing the interests of its key stakeholders — the farmer and non-farmer shareholders.
A good example of this was evident recently with the low milk price. A low milk price is bad news for the milk farmer but is good for the Fonterra Co-operative as it lowers its input price for value-added products. But instead of acknowledging that in some years the farmers will be happy and in others the non-farmer shareholders will enjoy the gains, the Co-Op tries to please everyone, tipping the scales in favour of the farmers — it is a farmer's co-operative after all.
We saw this in 2015 when interest-free loans were given to some farmers, on non-commercial terms and without consultation with other stakeholders.
There were rumours that such loans were going to be repeated when Fonterra announced its half year results, but given that Fonterra's debt levels are currently well above its target range, this was probably not feasible. Instead, Fonterra is looking to pay out 80% of its earnings by way of dividends, and accelerate the payment of these dividends to help farmers out.
Although all shareholders enjoy higher and earlier dividends, some shareholders would equally enjoy a reduction in debt levels and a prudent approach to capital management.
We all want to see a higher milk price so that farmers (and ultimately New Zealand) achieve a higher standard of living. However, all stakeholder interests need to be considered. This was one of the reasons we sold out of the Fund two years ago. We are disappointed that little has been done to improve alignment since then.
The war on cash
By David McLeish, Senior Portfolio Manager, Fixed Interest
Imagine being charged to keep your money in the bank. As crazy as it sounds; central banks around the world have begun cutting their key interest rates below zero. First it was Europe. Now Japan is trying it.
The idea behind negative interest rates is to encourage businesses and individuals to spend and invest, rather than save. Negative interest rates theoretically encourage banks to lend money out because the value of the cash held in their vaults is ever decreasing. Because individuals and businesses don't get rewarded for saving money, they will instead choose to borrow and spend, thereby boosting economic activity.
Unfortunately, central banks are realising that the theory doesn't always play out in practice. We humans don't always behave the way the textbooks suggest we will!
The Bank of Japan is now realising that deterring saving is not the same as incentivising spending.
When negative interest rates have been imposed, savers have simply found alternative ways to protect their nest eggs. For example, sales of personal safes in Japan skyrocketed last month, with some popular models selling out entirely in some stores, according to the Wall Street Journal.
Another theoretical impact of negative interest rates is that the country's currency will devalue, making exports cheaper and imports more expensive. However, the Yen increased in value after negative interest rates were introduced in January.
The realisation that negative interest rates don't really work as long as savers have an alternative will likely have caused a major rethink of strategy by these central banks.
Despite what some people say, spending and consumption does not drive the economy. It's the exact opposite. It is production and saving that drives an economy. At the risk of handing over even more control of our savings to banks and financial authorities, we can only hope that those standing up for their right to save are successful in their plight.
The Domino’s drone
By Manuel Greenland, Senior Portfolio Manager, Australia
When Henry Ford introduced the Model T he said, "I will build a motor car for the great multitude" and with that he introduced a revolution in motoring freedom. People could quickly and inexpensively travel further afield than they ever had before. Importantly, they could work further from their homes, which gave rise to urban suburbs, and cities as we know them. While we credit Ford for giving us the motor car, his inspiration was to envisage how our lives might change with the freedom of travel. More than cars, Ford gave us choice. The benefits a company's innovations deliver for customers count far more than its products or services.
The website of key portfolio holding Domino's offers me three pizzas of my choice for $30, and, knowing my purchase history, it also offers discounts on my favourite drinks and deserts. Once my order is placed, technology will update me on each of its stages right through to delivery. Instead of spending time shopping, cooking and cleaning up, I can enjoy an evening at my leisure. More than my favourite pizza, I am buying the benefit of greater choice for my evening.
Domino's Robotic Unit, or "DRU", is an autonomous pizza delivery vehicle. The vision is that in the future DRU will find the quickest route from the pizza oven to my front door. DRU will be quicker, safer and cheaper than delivery cars, and by using foot paths, avoid traffic congestion in dense metropolitan areas. My pizza will arrive faster and fresher, and cost me less.
Like Ford, Domino's seeks to offer its customers freedom and choice. By investing in better meeting their needs, Domino's will become more important to customers over time. It will also become increasingly hard for competitors to challenge. We wish DRU the best as he goes into field tests, but more than an exciting new robot, we admire the ambition and imagination with which Domino's seeks to better serve its customers. See more here.
Property Investment — REIT* all about it
By Zoie Regan, Portfolio Manager, Property & Infrastructure
Open a New Zealand media publication, and it's unusual not to read something about the residential property market. Meanwhile, commercial property (i.e. office, industrial and retail property), which is benefiting from similar underlying themes, struggles to get the same attention. As a case in point, we suspect many of you are unlikely to have seen during the month that two of our property investments, Kiwi Property and Goodman Property, reported respectable revaluation gains for the year of around $175m-$180m and $135m respectively (approximately 7% and 6% respectively).
Property prices, both commercial and residential, are being supported in part by strong investor demand given the low interest rate environment and dismal returns being offered on other low risk alternatives, such as bank deposits. With expectations for further interest rate cuts in New Zealand and for interest rates to remain low for the foreseeable future, we expect investor demand to remain unwavering.
Commercial property (particularly prime Auckland assets) is also currently benefiting from strong underlying fundamentals; vacancy remains tight and market rental growth is respectable. The theme here again is not too different from that in the residential market, with population growth driving healthy occupier demand for commercial property. Despite the headwinds from dairy commodity weakness, the New Zealand economy remains a relative beacon of strength and we see limited risk that the flow of migration and occupier demand for property will reverse anytime soon.
Exposure to commercial property is attainable for many New Zealander's through investments in the listed property companies or alternatively via our Property & Infrastructure Fund where approximately 15% of our portfolio is invested in New Zealand listed property vehicles. Listed property companies provide many investment benefits which should not be overlooked by investors: diversified property and tenant exposure, contracted rental growth, high liquidity and management expertise (with the New Zealand listed property vehicles on balance exhibiting improving capital discipline over recent years).
* REIT = Real Estate Investment Trust
Why does pessimism sound so smart?
An adaptation of a Motley Fool article written by Morgan Housel
"For reasons I have never understood, people like to hear that the world is going to hell" historian Deidre McCloskey told the New York Times recently.
Despite the record of things getting better for most people most of the time, pessimism isn't just more common than optimism, it also sounds smarter. It's intellectually captivating and paid more attention to than the optimist who is often viewed as an oblivious "sucker".
Pessimism overshadowing optimism is not necessarily a recent phenomenon. John Stuart Mills wrote 150 years ago "I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage."
In investing, some of the reasons pessimism sounds so smart are:
Optimism appears oblivious to risks so pessimism looks more intelligent. While optimists might acknowledge that we'll have recessions, bear markets, wars and panics they are prepared to endure these downsides. A pessimist sees a bad event as the end of the story. The difference between an optimist and a pessimist comes down to endurance and time frame.
Pessimism is based on not everything moving in the right direction, which is comforting to us. Misery loves company. We are attracted to the idea that things outside our control could be the cause of our own problems.
Pessimism requires action, whereas optimism means staying the course. Pessimism forces us to take action — sell, get out, run — which feels better than just sitting and hoping.
Optimism can sound like a sales pitch, while pessimism sounds like someone trying to help you. Actually, pessimism can be as big a sales pitch as anything — how many "buy gold" advertisements have you seen during times that seem highly uncertain?
So should you ever listen to pessimists? Of course. They're the best indication of what's about to change!
Inflation gets a Haircut
By Mark Brighouse, Chief Investment Officer
Former baseball player Sam Ewing once said "Inflation is when you pay fifteen dollars for the ten dollar haircut you used to get for five dollars when you had hair." Many of our investors, regardless of how much hair they have, will know that inflation has been trending downwards for a long time and inflation rates now sit just above or below zero in many countries, including New Zealand. Expectations about future inflation have also fallen.
Managing inflation is a tricky task for central banks. There is a "Goldilocks" level — not too high and not too low as either can be harmful — but that level is not defined, it can change, and it depends on inflation expectations.
The Reserve Bank of New Zealand's March Bulletin concluded that low inflation expectations are "contributing to the current need for low interest rate settings". This suggests that investors should get used to low term deposit rates for a while to come. The paper also hinted that low interest rates themselves may help keep inflation expectations low. This seems to point to a virtuous circle — as long as inflation expectations remain low, interest rates will follow suit, making it hard for savers to achieve decent returns.
In contrast, officials of the U.S. Federal Reserve think inflation expectations are now too low. They believe that inflation will be higher than the public and markets expect, and are preparing to raise interest rates over the next year or two.
The one similarity between the two central banks is that both consider the impact of a low oil price on inflation will be temporary. Time will tell whether they are correct in their assumptions and which of the two approaches — raising interest rates to manage inflation or lowering interest rates to manage inflation expectations — proves most successful.
One thing is certain — inflation will continue to be the most followed, most discussed, and most challenging economic metric for markets to consider in the year ahead.
Managing your KiwiSaver account
How your KiwiSaver account is taxed
They say tax and death are two of life's certainties. While we all hate paying tax, there's no avoiding it. In early April, your KiwiSaver account was adjusted to take into account the tax on your investment earnings for the last 12 months. But it's far from bad; here's why.
The Fisher Funds TWO KiwiSaver Scheme is classified as a Portfolio Investment Entity (or PIE for short) for tax purposes. The PIE regime provides a number of tax advantages for investors and makes the administration of it all very easy. The key advantages are:
Firstly, there is no tax on gains in New Zealand shares and certain Australian shares. Investments in companies outside that criterion are taxed as if they have earned 5% total income (regardless of how they have actually performed). Fisher Funds invests in growing companies which often have a low dividend yield and the majority of returns come from the increase in the value of the shares. This is a significant advantage for investors.
Secondly, investors are taxed at their marginal tax rate with a maximum of 28%. For investors on a top personal income tax rate of 33% this represents a 5% saving.
Thirdly, the Scheme takes care of all tax obligations on behalf of investors so there is nothing to include in your personal tax return. As long as we have the correct tax rate (known as your Prescribed Investor Rate or PIR) for you we will claim a tax refund or pay your tax liability on your behalf and adjust your KiwiSaver account accordingly.
Tasty PIEs indeed!
Calculating your correct PIR
There are three PIRs available for individuals to choose from: 10.5%, 17.5% or 28%. The correct rate for you depends on your income. We have a simple diagram that helps you calculate the correct PIR for you.
If you need to change your PIR, simply complete our PIR form and return it to us.
Don’t miss out on your annual Government contribution!
One of the great benefits of KiwiSaver that you don't want to miss out on is the annual government contribution of up to $521.
As a reminder, for every $1 you contribute to your KiwiSaver account you'll receive 50 cents from the Government, up to a maximum of $521.43 per KiwiSaver year, which runs from 1 July to 30 June annually. This generous KiwiSaver incentive is known as the Member Tax Credit (MTC).
Who doesn't love free money?
To maximise this year's full MTC entitlement of $521.43 you need to have contributed at least $1,042.86 (the equivalent of $20 per week) into your KiwiSaver account. If you have not put in at least this amount, you can top up your KiwiSaver account for the current KiwiSaver year (1 July 2015 to 30 June 2016) before Thursday 30 June 2016.
You can read more online about who is eligible for a MTC, how it is calculated, and how to make a payment.