Globally the financial world remains focussed on Janet Yellen, Chair of the Board of Governors of the Federal Reserve (the Fed), as she continues to suggest that the Fed will increase interest rates in the US at some stage later this year. As shown below in chart 6 the market is now pricing in a much higher expectation of rates rising in December versus September this year. In chart 7, the Fed dot chart, which shows each US Federal Open Market Committee (FOMC) members views on where they feel interest rates are heading that are all predicting rates will increase into the end of 2015, and increase further over the next few years. The red line on chart 6 is the markets expectations of what will they are pricing in with regard to rate increases. As you will note there is a large difference between market and the average FOMC expectations, and as such we may see increased volatility in the fixed interest market if the committee do commence tightening in next month instead of the end of the year. […]
One of the more disturbing market issues we have been watching over the past 6 months has been the reduction in diversification benefits between bonds and shares, as well as across borders. Under normal market condition we expect bonds to do well when shares are falling and vice versa. As shown in the table below, as all asset prices around the world are all pushed higher in the hunt for yield, shares and bonds have started to become much more correlated, meaning they are moving in a similar cycle, and hence we can expect to see this correlation hold should the share and/or bond markets suffer losses. Similarly we expect to receive diversification benefits from investing in different countries, but as correlations between countries continue to climb we are losing this as well. This loss of correlation will potentially have a large impact on volatility in returns of more normal portfolios, but is something that we are managing within our clients’ portfolios via the use of high conviction, benchmark unaware managers, who can move to cash in times of high […]
Local economy GDP in New Zealand from 2014-2015 was a respectable 3.5%. The farming sector made up c25% of this total, with the Christchurch rebuild making up a further 17%. As dairy continues to languish, and the Christchurch rebuild continues to slow to ‘normalised’ building levels, we expect to see the wider New Zealand economy slowing. The only major sector still supporting growth in New Zealand has been the record immigration levels we have witnessed over the past 12 months. Immigration alone made up over 45% of New Zealand’s 2014-2015 GDP performance. The slowing in New Zealand’s economy has led to a large drop in business confidence, as shown in the chart below, which in turn is leading the market to price in further cuts in the New Zealand Official Cash Rate (OCR). At present the market is reasonably confident we will see another 0.25% reduction on the 10th September, with the potential for a further similar rate cut in December taking the OCR to 2.50%, a level last seen in January 2014. Chart 1 – ANZ Business Confidence Index […]
The month of August has proven to be one of the most volatile months in share markets in over 4 years with both the Dow Jones Industrial and S&P 500 both producing five days in the month where they both rose or fell by over 2%. The volatility has been blamed on the drop in the Shanghai Composite, but the reality is that this might only apply the Chinese and Emerging markets. For the volatility seen in the US the catalyst was thought to be the next stage of the “Taper Tantrum” as the markets now priced in the expectation of the US Federal Open Monetary Committee (the Fed) increasing interest rates for the first time in over 6.5 years. There is little doubt that the markets initially got nervous about the drop in the Shanghai Composite, which has now dropped by over 39% since its high in June 15. This massive increase in volatility has led investors to finally start to review the pricing of risk in the markets, and hence we saw the S&P500 also drop by around […]
The Financial Adviser Act 2008 introduced an authorisation process to control who can and can’t provide financial advice. This has also caused some confusion, particularly for investors who are seeking financial advice. There are 3 categories AFA – Authorised Financial Adviser RFA – Registered Financial Adviser QFEA – Qualifying Financial Entity Adviser Authorised Financial Advisers (AFA) AFAs are registered on the Financial Services Provider Register and belong to a Disputes Resolution Scheme. They also go through a more rigorous approval process by the Financial Markets Authority and have higher competency standards. Authorised Financial Advisers can provide personalised advice on complex investments, such as shares, bonds, futures contracts etc as well as what RFA and QFEAs can advise on (discussed below). Typical clients are individual investors, trusts and companies. Authorised financial advisers must follow the code of professional conduct. (Roger, Jack and myself are AFAs and are Certified Financial Planners) Registered Financial Advisers RFAs are required to be registered on the Financial Services Provider Register and belong to a Disputes Resolution Scheme, they are not ‘authorised’ by the Financial Markets Authority. […]
Bonds are typically a word most investors have heard of, but it is an investment that is not fully understood. Shares however, are generally well understood, investors know they can fluctuate in value, they sometimes pay a dividend, they can be risky. Bonds are seen as ‘safer’ investment options, but that is not always the case. Bonds versus Term Deposits Comparing a bond to a term deposit from a major bank; a term deposit is an agreement from the investor to lend a specified amount of money to the bank, with an agreed interest rate, with agreed repayment terms. Throughout the term of the investment, the investor will receive interest on monthly, quarterly or at maturity of the investment. If the investor wishes to receive their money back, prior to the maturity of the investment, the bank will penalise the investor (for breaking their contract) by reducing the amount of interest which is to be paid. In New Zealand, this can turn a 4.5% interest rate (per annum), to a 1.5% interest rate by penalising the lender 3% of the […]
The information provided in this email is general only. It does not take into account the investment objectives, financial situation or particular needs of any person and may not be appropriate for your requirements. We strongly suggest that investors consult a financial adviser prior to making any investment decision.