The Blog

July Market Update

Is this as good as it gets? The US share market had a challenging June with the S&P falling 3% from its mid-month high before starting a slow recovery. As at 9 July 2018 the S&P500 was still 4.10% below the high reached at the end of January 2018. The US economy has just completed an outstanding second quarter with annualised GDP growth now at 3.40%. The last quarter also saw record high increases in corporate earnings of c.25% y.o.y, but is this sustainable? This outstanding growth in earnings has come on the back of record low interest rates, and tax cuts, both of which are now in the past. The Citigroup Economic Surprise Index for the US, which tracks how data is stacking up against analyst forecasts, turned negative at the end of June 2018 for the first time since September 2017 following a string of weaker than expected US economic data. We are now seeing S&P500 earnings per share forecasted to fall over the next five quarters. We also anticipate that the increasing risk of trade wars will […]

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June Market Update

PWA June Market Commentary The next Eurozone crisis may be building – “Quitaly” One of the outcomes of the Quantitative Easing (QE) that has occurred since the 2008 Global Financial Crisis (GFC) is that anyone with investments has seen their wealth grow, while those without investments have struggled. This has led to the gap between the “haves” and the “have nots” increasing substantially. In the democratic world, where the majority can vote for change, the widening gap has led to a rise in power for the “populist parties”. The most recent example of this is in Italy where the Five Star Movement and Lega parties have formed a coalition and are now sworn in as the new Italian government. Both these parties have come to power on the back of campaign promises to address Italy’s debt levels and the perceived Eurozone imbalance that the country suffers from. Both parties are also seen as “Euro-sceptics”. The coalition did not get off to a good start with their first choice for new Finance Minister, Paolo Savona, being vetoed by the Italian President […]

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May Market Update

3% US 10-Year Government Bonds – for one day As inflationary pressures continue to increase in America, we have seen bond markets continuing to price in a higher expectation of rate rises soon from the US Federal Reserve. Rising inflation, and the unwinding of US quantitative easing (QE), led the US 10-year government bond yield to move above 3% for the first time since December 2013. It stayed at this level for only one day, but this breach of what had previously been the upper bound of yields caused the market to finally take notice of the real risk of interest rates moving higher. The recent climb in the US bond rates means that US-based bond holders are finally getting a positive “real” return (the return after allowing for inflation) from holding these bonds. As shown in the chart above, since late 2016 Germany, the UK and Japan have been providing local investors negative real returns on their government debt. Yields in these countries have also started moving closer to a positive real return, however still lag rates in the […]

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April Market Update

Markets driven lower by tech scandal & trade wars In the quarter ending March 2018, we have seen further volatility and uncertainty in the markets. All developed markets have produced a negative return, while the emerging markets have managed to maintain a small positive return. The S&P500 had the worst first quarter performance since 1929 according to Bloomberg, bringing the S&P500 Price to Earnings ratio back to 16.5 times. A level not seen since early 2016. Over the last year, ending March 18, market indices have been positive. The lowest annual performance came from the UK (0.22%) and Europe (2.17%). The best performance over the past 12 months has come from the Emerging Markets (22.44%), followed the Dow Jones Industrial Index (19.39%). VIX index remains high Volatility remains high across all global markets, with the US leading the other markets for the first time since 2008. This indicates a high level of uncertainty in investors at present. This negatively impacts share prices as investors demand a higher potential return to justify the increased risk. This uncertainty has come from multiple […]

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The Importance of Independence

If you’re interested in understanding why people behave in the manner they do, have a read of Freakonomics. An economist and a journalist team up to provide some pretty compelling evidence to show you that not all is what it seems. An obvious example is whether your real estate agent really is motivated to get you the best possible price on your house. Or in reality, scratching out an extra $10,000 for you is really only worth a few hundred dollars to them, if that – so you really should accept this tabled offer, right? As a financial adviser, the world is riddled with conflicts of interest. As an investor, it is critical that you understand these conflicts, but more importantly, you need to determine what they are for yourself. The article below discusses the conflicts around the advice and products that the banks offer to their clients. Rather than give you my opinion, have a read for yourself.   Aussie banks with NZ presence warned over conflict of interest The financial advice arms of ANZ, National Australia Bank (which owns […]

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February Market Update

Moving closer towards the new norm? The share and bond markets have long been overdue a correction as they have reached and blown past previous record high levels. The recent volatility we have witnessed over the last couple of weeks has been excellent “click bait” for news websites. They love to sensationalise anything that will get their audience to click through to read their opinion. Beyond the sensationalism, in reality we cannot be certain this is the long-awaited selloff. At the time of writing, the concern is not so much the global sharemarkets – which may have a short sharp sell off before recovering on the back of rising inflation, global growth, and reducing unemployment. The concern is bond markets which, if we move into a sustained rising interest rate environment for the next 2-3 years, will struggle to produce positive performance. Fund managers holding long dated bonds in their portfolios will likely be the most negatively impacted if rates continue to rise. All these possible outcomes remain uncertain. We have seen this sort of volatility back in 2015, which […]

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November Market Update

Labour/NZ First/Greens are in – what does this mean? National won the NZ election with 44.4% of New Zealand’s voting for them right……? In the First Past the Post era this would have been true, but not with Mixed Member Proportional. Even after National received the most votes, and seats in Parliament, Labour has formed a coalition with NZ First and the Green Party to give them 50.40%, and 63 seats in government. So, what does this new coalition mean for New Zealand? Expected outcomes There is a lot of commentary around how Labour will negatively impact the NZ economy with their planned changes. Nothing is confirmed yet, and one would have to think they will be aware of the need to approach the changes in a somewhat cautious fashion to sustain growth. This has not stopped the NZ dollar from falling since the election on an expectation of an overall slowdown in the local economy. Labour has already confirmed that they will be reviewing the RBNZ’s charter to expand it from a focus on controlling inflation (target between 1% […]

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August Market Update

Where is the top this time? We have been concerned around the levels that local and global share markets, and bond markets, have been trading at for some time, however this has not stopped the US share markets continuing to reach and break record levels in share prices. Below we have included a chart showing the Shiller Cyclically Adjusted Price to Earnings (CAPE) Ratio for the Dow Jones index. This measure which looks at the cyclically adjusted ratio of the price of shares to the earnings of the share, is a reasonably good indicator of when a share market is overpriced or under-priced. As the chart shows, the only time since the late 1800’s that markets have been more overpriced by a CAPE measure was during the Dot.com bubble in the late-1990’s., This can easily be seen as a signal that US markets are expensive, but this does not seem to stop the markets testing new highs, and to date we have not seen any significant correction. Why? One bullish argument that some commentators are pointing to is the fact […]

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