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Farewell 2016. Bring on the party in 2017 for NZ KiwiSavers and Investors


04/01/2017

In spite of recent earthquakes, real and political, I’m as bullish on NZ as I’ve ever been. The markets have decided a Trump administration might be tolerable, and possibly beneficial to share prices in the way Reagan was. At home we have quickly returned to long term trends, which have been building for awhile now.

Offshore the environment is very uncertain, but here in godzone, the economy, and investment markets, are now likely to kick into an even higher gear.

Here’s why:

The safety trade

Low interest rates have forced pension managers overseas to look outside their home markets, to higher risk areas. That includes private equity, venture capital and smaller/emerging markets, like New Zealand. 

The amount of money they have to spend on acquisitions globally is truly staggering. In the US alone, there is over $2 trillion  of pension money waiting to invest in anything that looks like it generates cash, or a medium term capital return. That’s over 10% of US GDP.

Pension funds are desperate for returns, and are diving into uncharted waters to find them. This is where New Zealand has an almost unique global competitive advantage. When pension funds seek to invest overseas, (something they are usually nervous of), they will find New Zealand a comfortingly familiar place.

English language, rule of law, no corruption, high dividend yields, all these will make offshore investors feel more comfortable here than in many other places.  New Zealand is increasingly seen as an oasis of calm, and an authentic place. By and large it’s very easy to do business with. When those with money want to invest outside their comfort zone, these things really matter.

KiwiSaver 

Every week another $10m finds it’s way into the New Zealand equity market from KiwiSaver, and even more into local fixed interest markets.

This is like a rising tide, hard to spot minute by minute, but very powerful long term. All boats rise.

For an example of the long term effects of steady saving, look no further than Australia. One way they survived a collapse in commodity prices was no panic selling in markets. That’s because they knew money steadily arrives into their stock and bond markets, and stays there. That’s happening here too.

New Zealand is slowly becoming a capital rich economy. As much as we love to romanticise our number 8 wire mentality, too many entrepreneurs have gone overseas, or sold out to offshore buyers, for lack of domestic investment capital in NZ. That is about to change, big time.

Printing money 

Central banks have now had 8 years to change their mindset about printing money to support markets and economies. They used to be fearful of it, and used it only as a last resort ie. post GFC. Now their attitude is very different.

The fact is markets are awash with cash, and central bankers have, by and large, got comfortable with this. They will raise rates reluctantly, and lower them with ease. And they will now err on the side of printing too much, not too little.

The capital markets know this, and are much less scared of central bankers surprising them than they used to be. The will invest accordingly.

Sweeping away the traditional Institutions 

The markets are quickly re-adjusting to a capital raising model which is outside the restraints that listed markets and traditional institutions can impose. Whether it’s peer to peer lending, crowd funding, or direct investment from private equity funds and angel investors, funding the buying and selling of businesses is easier, and transactions are happening faster. And institutions like banks are getting less and less of the action.

If you have a business to sell, now is a very good time to be thinking about hanging out the ‘for sale’ sign, and exploring other ways to sell. 

It’s election year

Like or not, the Government is unlikely to be able to resist spending at least some of the surplus in the here and now. this will help the economy tick along, and it’s fair to assume any domestic political earthquakes are over!

What are the risks?

There is always the unknown, which, by definition, will hit us by surprise. The recent earthquakes were another salient reminder of that.

Trump is a wild card. I suspect we have yet to see his true colours, although thy are distinctly russian red so far. The markets hate uncertainty, and he is that personified. Reagan, the other potential wild card elected in my lifetime, had political experience in Californian politics. Trump has none. 

But you can protect investments against the unknown by diversification. For example, Simplicity is keeping all our funds in 9,000 different investments, in 23 countries. Diversify, diversify, diversify and the surprises will be less painful.

The end game

Over time, all this money finding NZ a great place to invest will lead to buyers paying way too much for some businesses. We haven’t yet seen too many eye popping transactions, but we will. That, in turn, will probably lead to a more severe correction than we would like, some distressed valuations, small panics, and another cycle complete.

When that happens though is anyones guess, and it will almost certainly be by surprise. But if the fundamentals are very bullish for some time yet. So, enjoy the ride, but stay diversified.

 

Ask Artie