Polson Higgs
Spring Update - “What shall we do with the drunken sailor?”
Welcome to the Polson Higgs Wealth Management Spring Update
“The news is all good”, as they say. It has been very interesting reading the articles that the economists and ‘experts’ have been writing on what is happening in markets and economies around the world.
We are in the “recovery phase”, the “sweet spot”, where we can enjoy rising share and property prices alongside low interest rates and low inflation. Theories abound on the shape of the recovery but otherwise there is general consensus that we are in recovery.
Looking back over the past six months since March 2009 the figures are quite spectacular:
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Table 1: Share Market Index Returns 9 March 2009 to 9 October 2009 | ||
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We have been surprised at the reluctance of some to invest ‘at the point of maximum potential’
It has surprised us that a number of our clients who we would consider to have been well-informed did not invest into their growth portfolios during the first six months of 2009 when they had the spare cash to do so. In hindsight, March 2009 was thought to have been one of the best periods to invest in shares in 150 years. Six months ago no-one knew what was going to transpire and it takes courage to buy when others are selling and when the popular press is all doom and gloom but there were also plenty of people explaining how cheap shares were. There was a fire sale going on but very few people turned up!
That’s not to say that it’s too late. Share markets would have to increase by more than 34% from their current position to get back to where they were in October 2007 and all other things being equal one would expect that to happen over the next year or two. It’s not as if there was a share market bubble in 2007. Quite the contrary. The bubble was in property and in the remuneration policies of finance companies and merchant banks, not shares.
What impact has the New Zealand dollar been having on your international returns lately?
Looking back at Table 1 above - We haven’t had those returns in our portfolios, of course, because at the same time as markets have been going up our New Zealand dollar has also been going up. Good news for local petrol prices which are imported but bad news for the value of your international investments (which are akin to exports). When our dollar goes up imports are cheaper and we get less for our exports; our New Zealand assets effectively rise in value but our international assets fall in value. See Graph 1 below.
In Graph 1 above, apart from New Zealand shares, it is the yellow column that shows you the return that you have received in your international share portfolios over the last six months, since share markets bottomed all around the world. The blue column is the share market return in their local currency. The green column is the impact of the rise in the NZ dollar. The yellow column is the overall result of blue minus green. What a drunken sailor that currency is. Remember though that that same drunken sailor helped us immeasurably when share markets were on their way down. Look at Graph 2 below to see how the fall in the New Zealand dollar (green column) from 1 October 2007 to 9 March 2009 while share markets were falling greatly assisted your overall returns.
Over this period the fall in the NZ dollar reduced the impact of the fall in international share markets. In Graph 2 above we can see the impact of the fall in the New Zealand dollar against the Japanese Yen of -45% (green column) reduced the impact of the fall in your Japanese shares from -58% to -13%. A very useful drunken sailor over that period although it didn’t help much with your UK shares.
So, where are we now? How do share markets and currencies stand today compared to where they were in October 2007 when all this business started? See Graph 3 below.
In Graph 3 above we can see that your Japanese shares are the best performing group over the two year period 1 October 2007 to 9 October 2009 taking the fall in our currency into account. They are down 16% from where they were in October 2007. Overall we are still a long way behind.
The interesting point in Graph 3 is that the best performing share market in this group, UK shares at -21%, are the worst performing in your portfolio at -44% due to severe weakness in the British pound. The big currency story at the moment is the weakness in the US dollar and British pound but as you can see it is the British pound that is the horror story. Given that the world is firmly in the recovery phase of the economic cycle, past experience points to the British pound doing well in recovery phases so perhaps those of you suffering at the moment, who get British pensions or have British superannuation investments waiting to bring back to New Zealand, have something to look forward to? We will have to wait and see.
In Graph 4 we have shown the returns required from share market and currency positions today to get back to where we were in October 2007. These percentages are using today as the base rather than October 2007.
In Graph 4 you can see that, using today’s values as our starting point, we would need a return of 35% in New Zealand shares to get back to where we were in October 2007 and between 34% and 45% return in the other currencies to do the same.
This is a useful exercise if we think that the share market levels weren’t unreasonable back in October 2007. This is of course, not scientific, only anecdotal, but still interesting. Share markets did not exhibit evidence of a bubble in October 2007. The bubble was in residential property. Certainly the world is a different place today than it was in 2007 and there is still much for international banks to work through but it shouldn’t be long before its business as usual with firms selling a higher standard of living to second and third world countries. There is a long way to go to bring the majority of the world up to first world living standards.
What are the prospects for the future?
What is going to happen next? It is a natural curiosity but one that shouldn’t be taken seriously, certainly not acted upon. The immediate future is random. Sure, the most likely scenario is always a continuation of the status quo; at this time, an improving trend. But if we expect that and we get it what does that tell us about our forecast? Nothing really. It could just as easily have turned out different. We certainly shouldn’t take any credence for it otherwise we might think we’re clever and start taking bets on the outcome.
Central banks tell us that there are still problems to sort out in various parts of the world economy but confidence has returned in the ability of the authorities to fix the big problem - we haven’t gone into an enormous depression and it is not expected that we will.
Not that there is too much euphoria around. It seems that everyone is still pretty timid, even the optimistic ‘bulls’ are relatively subdued. There is considerable wariness of another bubble developing and that scepticism should keep markets in reasonable check.
In the short term most of what we hear is ‘noise’ and unreliable. Longer term the prognosis is much easier. Markets will be up.
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International (Plan B) Portfolio Returns to 30 September 2009* | ||||
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3 Months |
6 Months |
1 Year |
Since Inception (May 2005) |
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Global 55 |
6.8% |
15.3% |
3.1% |
6.2% |
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Global 65 |
8.1% |
18.0% |
2.6% |
6.2% |
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Global 75 |
8.7% |
19.8% |
1.1% |
5.8% |
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Global 85 |
9.2% |
21.3% |
0.4% |
5.6% |
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Global 95 |
10.3% |
23.8% |
-0.6% |
5.2% |
These returns do not include New Zealand fixed interest or shares. These returns vary on a case by case basis and are included in your individual reports.
Please don’t hesitate to give any of the team a call to discuss these or any other matters.
The Polson Higgs Wealth Management team, 16 October 2009.
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* Before Adviser fees and the Plan B Issuer/Administration fee which vary according to portfolio size
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Last updated: 28th Oct, 2009 | 9:22 am
