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February 2015

Expect the unexpected!

Welcome to 2015 ... already it feels different doesn't it? The choppy start to the year has been something of a rude awakening for investors who enjoyed a relatively smooth 2014. In our December newsletter last year we talked about sitting back and doing nothing because markets looked set to keep on keeping on. This wasn't a glib comment – barring a few tumultuous weeks, last year was relatively calm (apparently some 20% calmer than "normal" according to statisticians). Yet here we are in the early weeks of 2015 and already we've faced a market that has been just as choppy as the worst weeks of last year.

Markets are in a state of flux because we have started the year, as indeed we do every year, with a variety of things we feel we should be nervous about. On top of the usual worries (like geopolitical tension, terrorism and low economic growth) January featured two surprising developments – divergent behaviour by policy makers (such as the Swiss central bank's surprise decision to stop pegging the franc's exchange rate to the Euro) and the end of the commodity super-cycle.

Monetary policy divergence is an interesting one. For years, markets have focused on the US Federal Reserve's policy, with every decision analysed and responded to by market participants around the globe. This fixation was understandable because every one of the Fed's policy decisions impacted the Holy Grail or anchor of asset valuations, the risk-free rate.

Uncertainty about movements in the risk-free rate had implications across the universe of fixed interest assets and shares (not to mention property, gold, and indeed all assets) as well as the global economy at large. While the Fed's quantitative easing (QE) programme dominated markets for a long time, and only history will confirm for sure whether it was successful, it at least brought calm to investors because the policy and its economic impact became relatively predictable. Now of course, the Fed has put an end to QE and is relying on the economy to maintain its own momentum.

Meantime, the European Central Bank is embarking on its own QE programme in order to avoid deflation, and the Bank of Japan and central banks in China, India and Turkey are following suit or expected to in the coming year. The divergent monetary policies are causing havoc with currency markets which makes it even harder than usual to know where to invest for optimal returns.

The other big contributor to volatility year-to-date has been the slump in commodity prices. We've all heard lots about the oil price which has actually been falling for a long time now as the world's economy has lost momentum. It's not just that demand for oil and other commodities has fallen, in part because China is consuming less than it used to; there has been significant investment in commodity production in recent years and as fresh supply comes on the market, it is serving to keep a lid on commodity prices.

What does the end of the commodity cycle mean to markets? Well, as always there are winners and losers. Obviously commodity exporters will have to find other ways to make money. But consumers will benefit from lower prices for all manner of products and services, and manufacturers will enjoy lower input prices so will either be able to increase profitability or sell their products cheaper, both positive outcomes. Meantime, commodity prices will likely remain volatile – oil prices can bounce just as easily as they fall – and markets will react accordingly.

Carmel Fisher

While markets have encountered a few new uncertainties at the start of this year, they are still just risks to be managed rather than fundamental game-changers for economies or markets. The US economy is doing better than most expected, and elsewhere economies are generally growing at a fairly good rate. There are pockets, namely Japan and Europe, which are doing less well and they of course will get all the attention. But the base case scenario for 2015 remains positive.

Yes, we should expect the unexpected, but to quote an unnamed philosopher I stumbled on recently, we will also do well to "believe the unbelievable and aim to achieve the unachievable".

Carmel Fisher
Managing Director | Fisher Funds

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Team Talk February 2015Team Talk

It's easy to get distracted by headlines and January provided plenty. Carmel Fisher discusses the market and outlook for 2015.


Your KiwiSaver Portfolios

Highlights and Lowlights

  • Highlights and LowlightsEuropean share markets rebounded strongly over the month in response to the European Central Bank announcement of a quantitative easing programme.
  • The negative impact of a strengthening US dollar on US corporate earnings is starting to be felt. We are starting to see some companies guide earnings expectations down due to US currency strength and we expect this to be a common theme over the reporting period.
  • The unabating global hunt for yield continued to give strong support to bond prices, property and utilities companies and those companies with a strong dividend yield.
  • Closer to home, Summerset (+11.9%) was rewarded by investors for achieving record sales of occupation rights during the December quarter and Kathmandu has continued to struggle in Australia, where sales have been weak. This has had a significant adverse effect on margins, particularly over the key Christmas period, and we are reviewing our position in the company.


Postcard from Beijing

By Roger Garrett
Senior Portfolio Manager, International Equities

Postcard from BeijingDavid McLeish, Ashley Gardyne and I travelled to China in early January to get an "on-the-ground" update on China, meeting with a range of current and potential portfolio companies. While poor air quality and traffic congestion remain a regular feature of the Chinese landscape, a more downbeat view by many commentators on the outlook for Chinese growth contributed to the grey atmosphere. After a sustained period of slowdown there is now a growing realisation that the Chinese economy is permanently transitioning to a lower growth rate. The days of reading about 12% growth are over; albeit that with growth forecast at 6.8% in 2015, China still has enviable momentum. What interests us most though is the changing face of Chinese growth.

Chinese President Xi Jinping's aggressive anti-corruption campaign appears to be gathering momentum with corruption charges being laid against very senior Communist party members. Whether it is an attempt to strengthen his power base or is a bona-fide programme to eliminate corrupt practices in China, this climate of fear has paralysed local government infrastructure spending with the money flow all but dried up. Many significant projects are well behind schedule and you only need to look back a few years to recall how much infrastructure spending stimulated the Chinese economy post-GFC.

This logjam has had a flow-on effect to the business models of local banks and financial institutions that we visited. Over the last 12 months, they have significantly increased their lending to retail clients which has encouraged leveraged investment in the local share market (no coincidence the local market was so strong in 2014, rising over 50%) and also helped fuel consumption.

Adjusting to slower growth is always challenging but there are pockets of growth, especially in the technology and retail sectors, that we're excited about and following closely. Consumption is heralded as an important growth driver as investment spending wanes and Chinese consumers are embracing the digital trend. Online retail is expected to grow in excess of 25% p.a over the next three years, over three times faster than overall retail growth. This is being driven by the increasing use of mobile to undertake transactions with China expected to become the largest m-commerce market in the world in 2015. The digital ecosystem (product research, discovery, transaction and feedback) is maturing in China with consumers heavily influenced by feedback through social media. This system continues to be dominated by three players – Baidu in internet search, Alibaba in distribution and Tencent in social media and these companies remain potential investments for us.


What does it mean for investors when consumer prices are falling?

By Mark Brighouse (Chief Investment Officer) and David McLeish (Senior Portfolio Manager, Fixed Interest)

What does it mean for investors when consumer prices are falling?Over the final three months of last year the price of petrol notably fell and miscellaneous items like shampoo, men's socks and cling food wrap also declined in price. These are just some of the selected items that make up the Consumer Price Index (CPI) which saw a 0.2% decline over the quarter and is likely to also show a decline over the early part of 2015.

Falling consumer prices are termed "deflation" and this has become a global trend with many countries showing falling CPI numbers (especially in Europe). On the face of it, lower prices should be a good thing but many experts are concerned that it is potentially a greater evil for the broader economy than rising prices.

The fear is that genuine, broad-based deflation would cause consumers to delay all kinds of spending. As demand slows, businesses would strike difficulties and some may default on their loans, lay off staff orpostpone capital spending.

However, it seems that consumers are not that keen to delay spending even when faced with a high likelihood of lower prices in future. The queues to buy new digital devices are testament to the consumer desire to have things now even if future prices are almost certain to be lower.

For share market investors, selecting the right companies becomes more important. Deflation affects companies differently and those with the strongest pricing power are able to grow their businesses even when prices are declining. In share portfolios we consider the long-term trends in an industry and look for companies with growing businesses and resilient prices.

For fixed interest investors, falling consumer prices can cause dramatic changes in the investing landscape. When we look at the yields on government bonds we can find at least ten countries whose bonds are trading on negative yields. That is to say, those who buy these bonds and hold them to maturity will get back less than they paid for them, even after taking into consideration the interest they receive. It seems strange that investors would be lining up to get less money back than they put in, but this is what negative yields mean. One possible reason is that investors are so cautious that they are prepared to pay have the government safeguard their savings. However, the gradual improvements we are seeing in confidence about the economy suggest that pessimism is not the reason for negative yields.

Instead it looks as though deflation concerns may very well be driving investors' decisions. In the world where the price of goods and services are getting cheaper day by day the purchasing power of your money is improving even for those investors buying bonds on negative yields. After all, in an environment where prices are falling, you are able to buy more with each dollar tomorrow than you could have today.


An Apple a day

By Carmel Fisher, Managing Director

An Apple a dayForget the debate over whether iPhones are better than androids – that argument will continue for years. The real debate is whether there will ever be a time when selling your Apple shares makes sense. There have been so many potential catalysts to end Apple's dream run – the death of Steve Jobs, the plateauing of iPad sales, the increasing popularity of Samsung products, criticism over Apple's pricing, the security breach targeting celebrities, and the bendy iPhone 6 – but the company and its shares keep performing. The analyst who in 2013 said "Apple is not a viable business model: it is, like Jobs, an unrepeatable corporate freak show" must want to eat his words.

Apple Inc's latest quarterly results surpassed even the most optimistic expectations. The company reported record-breaking earnings of US$18 billion for the three months to December 2014, on revenue of US$74.6 billion. Analysts had expected Apple to achieve revenue of US$67.69 billion, and many were skeptical the company would get there. The company's performance was especially impressive in China, where it was the top smartphone seller during the quarter, with revenue from greater China, which includes Taiwan and Hong Kong, rising 70% during the quarter, to $16.1 billion. That means that the region is close to overtaking Europe as Apple's second-biggest market.

For a successful company that already has a significant market share to achieve increased sales, at a higher price and with a larger profit margin on those sales is seriously impressive. Many companies would kill to have Apple's commercial footprint - 74.5m iPhones sold in three months, which equates to more than 34,000 phones an hour, 567 per minute or 9.4 units a second!

The Apple share price has rallied 40% in the past year and lifted a further 7% after the result. You'd think that some investors would want to take some money off the table after its incredible run. But a quick Google search of "Buy Apple shares" yielded 104 million results versus just 50 million for "Sell Apple shares". And most of the Sell Apple results were from a few years back. This company and stock seem, at least for the moment, to be able to keep on keeping on.


KiwiSaver classroom

While we try and keep our communications simple to understand, sometimes investment lingo can sneak in. We continue our series breaking down some of that jargon.

This month, we write about diversification

As a fundamental investing concept, diversification is a word that is regularly mentioned in articles or commentary relating to investing. The idea behind diversification can be simply explained as "not putting all of your eggs in one basket". Diversification lessens the impact of poor performance by any one part of your investment portfolio, potentially providing smoother returns.

While that explanation sounds understandable enough, there can be a tendency for diversification to be considered too simplistically.

Diversification needs to be thought about as relating to different sorts of investments, rather than just a whole bunch of investments. Six rental properties do not make a diversified property portfolio, even if they are in different suburbs.

Successful investors will aim for geographical, sector and asset class diversification and this is the approach that we take when investing your KiwiSaver savings.

While we invest in New Zealand companies that you are familiar with, we also invest in Australia and all over the world. By investing outside of New Zealand we are able to access investment opportunities for you that don't exist here and we can access much larger markets. For example, our KiwiSaver Growth Fund invests across companies located in over 40 different countries.

The Global Industry Classification Standards identifies 10 sectors in the share market. They are financials, information technology, health care, consumer discretionary, industrials, consumer staples, energy, materials, utilities, and telecommunication services. Owning shares in Mighty River Power and Meridian may have generated great returns in 2014 but provided exposure to only one of the 10 sectors. Had they performed badly in 2014, owning shares in one of the other nine sectors might have helped mitigate the risk.

Lastly, there is asset class diversification which refers to the mix of risk and return you are exposed to. Your portfolio should have a mix of lower risk but lower return assets such as cash and bonds and higher risk but potentially higher return assets such as shares and property. Our KiwiSaver Funds have a different combination of these assets that reflect the different investing timeframes and appetite for risk of members.

The current geographical and asset class mix of your KiwiSaver funds are regularly updated in our quarterly disclosure statements which can be viewed here.


Getting to know ... an inspirational Kiwi, Mal Law

Getting to know ... an inspirational Kiwi, Mal Law  Every now and again we come across ordinary Kiwis doing truly awesome things that inspire us. On the 7th of February 2015 Kiwi adventurer Mal Law set out on an epic challenge of unprecedented proportions. His twin goals were to:

  • Climb 50 peaks and run the equivalent of 50 off-road marathons in the space of just 50 days; and
  • Raise at least $250,000 for the Mental Health Foundation of NZ

Fisher Funds is excited to be part of this journey with Mal and are pleased to be the sponsor for Day 48 of the High Five-0 Challenge on March 26, 2015 in the Waitakere Ranges.

Three of the Fisher Funds team (Frank Jasper, James Paterson and Michael Raynes – seen training in the picture) are running alongside Mal to help get him through the day.

The cause Mal is supporting, The Mental Health Foundation of New Zealand, is one that truly deserves our support. Everyone knows someone who has been affected by mental health issues - it is a problem that will touch all of us in some way at some stage in our lives. This is a chance to do something meaningful to help.

Please help us help this inspiring Kiwi to pull off the unthinkable. If you'd like to make a donation, please click here. Fisher Funds will match all donations up to a total of $5,000. Learn more about this epic challenge and the man himself.

We really appreciate your support!


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