History's least loved bull market
I recently read an article describing the bull market of the last seven years as 'history's least loved'. It noted that even as markets have risen over the years, headlines have constantly spouted warnings about the 'next big bad' for markets, leaving people feeling pretty anxious.
A Credit Suisse strategy paper similarly noted that after visiting clients in the US, Europe and South Africa they found them to be 'as bearish on equities as we can remember'. They said their clients (who are generally fund managers and professional investors) felt that shares are too expensive and not attractive enough to compensate for the macro, political, earnings and business risks that exist today.
It is indeed hard to know how to feel about these markets. Returns from a number of markets have been pretty good, but there are things happening every day that encourage anxiety. Take low interest rates for instance. While mortgage holders might be happy about them, investors who rely on investment income have every reason to feel anxious when rates remain so low for so long.
We justifiably felt a bit of anxiety following Britain's momentous decision to leave the European Union. But then, within days markets shook off any anxiety and within weeks some markets have delivered virtually a year's worth of return.
One of the reasons investors have been feeling glum or pessimistic is that for the first half of this year we've been constantly reminded of all the things we should feel pessimistic about.
China was going to suffer a hard landing, and that was going to affect the world economy, and particularly those of us who trade with China. But actually, so far so good. Chinese gross domestic product is on track to grow by around 6.7% for the year.
Low and negative interest rates were supposed to cause havoc, but actually while we still scratch our head about negative rates (why would anyone want them?) fixed income investors have simply widened their search and found other investments to give them a decent income.
Company earnings were supposed to struggle to keep up with share valuations, and earnings disappointments were going to cause share prices to tumble from their lofty heights. But actually, earnings have been okay, and lofty share prices don't seem that lofty when interest rates are as low as they are now.
Politics, especially in the US and Europe, were supposed to be a big risk for markets because the 'wrong' outcomes could derail global trade and economic growth. But markets have taken politics in their stride, as we've seen in the last month, and apart from bouts of volatility, politics have largely turned out to be media fodder rather than a significant driver of markets.
There will be plenty of politics in the next four months. Given the closeness of the Trump/Clinton polls, it is likely that a potential Trump win will emerge as the 'biggest bad' that investors have to worry about heading into the end of the year. It will be bad because the effect of a Trump win will be uncertain for markets, and markets hate uncertainty.
It's not uncertainty about economic policy that will worry markets — Trump's intentions have been relatively clearly signalled and they will take some time to implement. Rather, markets will concern themselves with a possible Trump impact on the Federal Reserve's policy stance. There is no doubt share markets have remained strong because of the Fed's interest rate policy — low interest rates make shares attractive. Trump has talked tough saying he intends to 'audit the Fed' but that doesn't mean he will (or can) change their policy approach.
Still, the next four months may turn out to be this year's 'least loved'. Or, the year to date trends may continue, and we may find ourselves worrying for nothing.
Managing Director | Fisher Funds
Highlights and Lowlights
A snapshot of the key factors driving the performance of markets and your funds last month.
- In the New Zealand portfolio, the Michael Hill International share price lifted 29% for the month after the company released strong sales figures for the year to June and announced a major roll out of its new Emma & Roe chain of stores. Auckland Airport reported another strong month of passenger arrivals and Summerset Group reported strong sales of occupation rights for both new and existing units and beds at its retirement villages for the second quarter.
- Our Australian portfolio performed strongly over the month, ahead of the broader Australian market. The portfolio was strong across the board, with stocks enjoying a post-Brexit relief rally. ResMed surprised the market with a strong fourth quarter result reflecting positive sales and profit performance. Shares in asset manager Henderson Group staged an initial recovery, as the company reassured investors of its continued ability to market European and British products regardless of the Brexit referendum result. The mining sector, in which the portfolio has no positions, continued its strong rally.
- International markets have bounced back well from the shock of the Brexit vote in the UK in late June. The S&P 500 (American stock market index) bounced to record highs, the FTSE 100 (UK stock market index) continued its strong recovery and continental Europe and Asia rallied, however still remain down for the year. The improved sentiment in markets has been mainly driven by hopes of continued low interest rates, however this could change if higher wages prompt the US Federal Reserve to resume hiking their target rate. Consumer discretionary and information technology stocks performed well this month. Like Bayer Motoren WK (BMW) +16%, Louis Vuitton Moet Hennessey +12%, Toyota Motor +15%. Strong information technology stocks included SAP +16%, Qualcomm 15% and Alphabet Inc +11%. The New Zealand dollar was relatively stable against the four main currencies compared to the volatility we've seen over the last six months. Emerging markets outperformed developed markets and stock selection continued to have a large impact on the emerging market portion of the fund with companies in the materials and information technology sectors lagging the index.
- Bonds continued their solid performance this month. Ever reducing cash rates around the world continue to push investors out of deposits and into higher income generating assets such as bonds. This 'hunt for yield' shows no signs of abating and with the outlook for the Official Cash Rate in New Zealand to fall further over the coming months, we think fixed income assets will remain in strong demand for now.
Your KiwiSaver portfolios
By Roger Garrett, Senior Portfolio Manager, International
Last month I wrote about consumer companies attempting to improve profits through premiumisation of their product ranges. Many are also embracing the new digital age with real gusto as a means of better engaging with their customers. Gen Y and millennials are important markets for consumer companies and these customers are digital natives, expecting everything online, with high use of mobile and social media.
As such building a digital strategy is an essential part of both attracting the targetted consumer's attention, and informing them of products by listening to consumer feedback, often done through social networks. Companies can use the wealth of data available to be more precise in their digital marketing efforts to an increasingly fragmented market. L'Oreal report that YouTube has 45 billion views on beauty products each year, so the potential reach through this channel alone is enormous.
Companies also realise they need to be innovative in their approach in the digital age. McDonalds has perhaps stolen an early march on its competitors with its involvement with the phenomenon that is Pokémon Go. The initial success of Pokémon Go is unparalleled and McDonalds have been able to dramatically increase traffic into their stores by being part of the virtual reality game. No doubt they and others will look to capitalise on Pokémon Go's success through more innovative and targetted means.
How best to participate in a prolonged building cycle in New Zealand
Murray Brown, Senior Portfolio Manager, New Zealand
With new residential building starts in New Zealand already ahead of long term averages, Auckland's proposed Unitary Plan will likely see the residential cycle stay 'higher for longer' and make the boom-bust cycles of the past much less likely, in our opinion.
The Auckland Council recently released the independent panel's recommendation of the Unitary Plan for housing development over the next 30 years. It foresees the need for up to 400,000 additional dwellings based on the Auckland population reaching 2.5 million people by 2041. This implies an annual build rate of 13,300 houses per annum, compared to around 9,400 currently being built. Clearly, builders have a lot of work ahead of them.
A key question is how best to take advantage of this elevated building activity in your New Zealand portfolio. The likely listed companies are Metro Performance Glass, Fletcher Building and to a lesser extent, Steel & Tube.
We have owned shares in Metro Performance Glass since its listing in July 2014. Although it had initial teething problems with its new plant in Auckland, this plant is now running efficiently and the company is very well placed to take advantage of this elevated building activity. The company has around 55% market share, efficient distribution, and its earnings are highly correlated to the residential building cycle. In addition, it has a double glazing retrofit division which should help smooth earnings in slower times.
Fletcher Building is also well placed to take advantage of the building cycle, although it is not a pure-play on New Zealand, as it has substantial operations in Australia and the rest of the world. Steel & Tube is more heavily geared to the non-residential building cycle, and its earnings are influenced by the international steel price. Although we don't discount Steel & Tube as an investment candidate, we favour Fletcher Building and Metro Performance Glass for the above reasons in our portfolio.
Pokémon Go — investment value as elusive as Pikachu
We explore the hottest game to hit your screen
It has been hard to miss the Pokémon Go phenomenon that took the world by storm last month. In the 22 days following launch, Pokémon Go clocked more downloads in the US alone than the total downloads of Instagram and YouTube in the past six months. Pokémon Go is an 'augmented reality' game that is popular because it's free, easy to download and play and it's a revamp of the original Pokémon series that was a huge success when it launched 20 years ago.
As a game, Pokémon Go has been an unequivocal success. However, as an investment, well, the jury's still out.
Pokémon Go was developed by app designer Niantic, which was until September 2015 a division of Google. Niantic is now part owned by Google, Nintendo and The Pokémon Company, but information is scant as to who owns what.
Analysts are divided as to the long term value inherent in Pokémon Go. The game is free, and while players can buy items with real money that help them lure Pokémon, this revenue is unlikely to be significant. Disclosure from Nintendo has been poor to date, and as Bloomberg recently reported 'Nintendo stood by for more than two weeks as the game's release added $US20 billion to its market value. Then it announced the earnings impact from the game will be limited, and it was not modifying its 2017 profit forecast, suggesting the upside is underwhelming.'
The long-term success of Pokémon Go will depend on the game's update schedule — perhaps introducing multi-player and battle functions and hopefully they'll find ways to monetise this phenomenon. And of course there might be brand extensions like movies, theme parks, merchandise and in-app advertising.
In the computer games sector, fans often have a better experience than investors. We are happy to enjoy this game as players (well, some of us) and as investors through our holding in Alphabet which gives us a broad exposure to the augmented reality and virtual reality revolution.
Living in the real world
David McLeish, Senior Portfolio Manager, Fixed Interest
As interest rates hit new lows, grumbles over the paltry income that bonds now offer grow louder. After all, at 2.25% the yield on the 10-year New Zealand government bond is hardly something you would write home about.
This has left investors yearning for the good old days, 10 years ago, when the same bond offered an almost 6% yield. But before we all get down in the dumps, this comparison lacks some important real world context.
By deciding to save or invest your money, you are simultaneously making a decision not to spend it. What can sometimes be overlooked is that there is a cost associated with not spending. That cost is the amount at which the price of the things you plan on buying in the future goes up before you buy; otherwise known as inflation.
It is no coincidence that the term given to subtracting the level of inflation away from an investment's return is called its 'real' yield. By adjusting for inflation we find that the real yield of the 10-year New Zealand government bond is in fact exactly the same today as it was back in those 'glory days'. In other words the purchasing power of a 2.25% return today is exactly the same as 6% was back in 2006.
Such a surprising outcome can be explained by the difference in the rate cost of goods and services were rising back then versus now. In 2006 inflation was running at a whopping 4% per annum. That same rate today is just 0.4%.
So next time you find yourself pining for the good old days of higher bond yields remember what counts isn't how much you earn but how much you keep (after inflation).
Being specific — especially attractive
By Manuel Greenland, Senior Portfolio Manager, Australia
We recently added two software companies to our Australian portfolios. Aconex provides a project management solution for complex construction developments. Wisetech's solutions reduce costs, better manage risk and maximise efficiency for freight forwarders. Their focus on specific industries makes these companies especially attractive.
Greater focus delivers a better product. Rather than seeking to design a 'one size fits all' solution, Aconex and Wisetech focus on providing solutions specific to the industries they serve. Both companies' products evolve in response to their clients' needs and feedback.
An industry focus drives faster software adoption rates. Once key industry players start using the software, others must quickly follow to remain competitive. Leading logistics company DHL recently adopted Wisetech's software; in future other freight companies seeking to work with DHL would benefit from using the same software. Similarly Exxon Mobil has begun using Aconex's solution for its complex oil and gas projects; any companies working on Exxon Mobil's projects will also have to use Aconex's software. Aconex and Wisetech can rely on this network effect to drive adoption of their software, allowing them to grow rapidly and spend less on marketing.
Industry specialisation makes for stronger client relationships. Both Aconex and Wisetech software is core to their clients' businesses. For a client to switch to a different solution would be costly and risky, making clients reluctant to move to competitors. Most of Wisetech's impressive revenue growth has come from selling more to its customers as relationships have deepened. By capturing all construction project data, Aconex provides one essential version of the truth for everyone working on a specific project. Both companies' software is mission critical for their clients.
Accounting software specialist Xero has shown how focusing on one industry can deliver high growth rates and sector leadership. Early wins in their sectors make Aconex and Wisetech similarly promising.
How to determine if a company’s dividend is sustainable
Mark Brighouse, Chief investment officer
With interest rates falling to abnormally low levels and set to go even lower, many investors are turning to shares to generate income. The New Zealand sharemarket has been a clear beneficiary of this trend outperforming other markets thanks to its attractive dividend yields.
However, investors need to be careful when buying a share for its dividend characteristics. On one hand we should expect that the directors of a company will only set a dividend that they're confident they can maintain. But in a world where the market rewards companies with high dividends it can be tempting for companies to do all they can to lift dividends — sustaining them over time may become an issue.
There are a variety of ways higher dividends can be achieved by eroding the future profitability of the business. A manufacturer could direct all spare cash to dividends and fail to set aside money for new product development. A property company could pay out all rents as dividends and then be short of cash when a building inevitably needs maintenance. A bank could pay a hefty dividend and not make sufficient provision for when some of the loans don't get repaid on time.
Techniques to help understand how sustainable a company's dividend include looking at the payout ratio. This is the portion of a company's profits that are paid out as dividends. A payout ratio close to 100% indicates that the company has very little left over to invest for growth or to provide a buffer in tough times.
We can also look at the dividend compared to the company's free cash flow per share. For example the company might be making profits but not generating much cash. In this situation, dividends will have to be funded by increasing debt in the business, or by raising more capital from shareholders.
We're seeing a stream of new investments coming to market which heavily promote their yield to investors. Before investing in such products it's important to understand what the true sustainable yield is; otherwise you may be paying for an income which isn't really income at all. The allure of an attractive dividend should not get in the way of sound analysis of the sustainability of that dividend.
Managing your KiwiSaver account
Extra money for more first home buyers
Last month the government increased both the income and house price caps for KiwiSaver HomeStart grants to ensure it's helping more New Zealanders into their own home. The scheme offers grants of up to $10,000 for an existing house, and $20,000 for a new house to add to a deposit for first home-buyers.
KiwiSaver is a great way to save for your first house and it offers great bonuses to people who qualify. With house prices continuing to rise, these changes are designed to help more first home buyers achieve the Kiwi dream of owning their own home.
The table below details the changes. Take note, there is now a different house price cap for existing and new homes; a further incentive to buy new.
|Old criteria||New criteria
(From 1 August)
|Single person, p.a.||80,000||85,000||+5,000|
|House price caps|
|Rest of NZ||350,000||400,000||+50,000|
|Wellington, Christchurch, Hamilton, Tauranga, Queenstown & Nelson-Tasman||450,000||500,000||+50,000|
|New build home:|
|Rest of NZ||350,000||450,000||+100,000|
|Wellington, Christchurch, Hamilton, Tauranga, Queenstown & Nelson-Tasman||450,000||550,000||+100,000|
KiwiSaver can have a big impact when buying your first home, especially those looking at new homes
Here's an example of how it works ...
Harry and Emily are looking to buy their first home. A brand new $550,000 house built in Hamilton. They both earn $60,000 a year before tax and have been contributing 3% to their KiwiSaver accounts for the last five years.
The above example excludes the impact of investment returns. Harry and Emily have also received employer contributions of 3% (after deducting Employer Superannuation Contributions Tax).
Thanks to KiwiSaver, Harry and Emily now have $55,810 to use towards the purchase price on their new home — without it, their first home may still be a dream.
You can read more about using KiwiSaver to help buy your first home on our website.
Latest Morningstar KiwiSaver survey good reading for Fisher Funds TWO KiwiSaver Scheme members
Independent research house Morningstar has just released their latest quarterly performance survey of KiwiSaver schemes for the period ending June 2016. Pleasingly, our Cash Enhanced (Default) and Balanced Funds were ranked 1st and 2nd respectively in their categories for returns for the 12 months ended June.
While we normally wouldn’t focus too much on one quarterly survey the results were welcome as investors have had to weather more bouts of volatility over the last year. Our performance was a reflection of our more defensive positioning relative to many of our competitors and was an outcome of improvements from across a number of asset classes rather than just one or two that had their “day in the sun”.
Diversification is an important tool in our investment team’s arsenal and is an investor’s friend. It ensures that your money is invested across the asset classes reducing the risk of one asset class having an outsized negative impact and at the same time ensuring you don’t miss out on returns by not being invested in certain parts of the market.
You can check out the survey here.