Political instability, rise of the 'loser' threaten sharemarket investors, NZSA meeting told
Political uncertainty poses the biggest threat to sharemarket investors, according to two speakers at the New Zealand Shareholders' Association annual meeting today.
Events such as Brexit and the rise of American president hopeful Donald Trump present more risk to investors than economic factors and politics is a big backdrop to the environment investors operate in, said economist Shamubeel Eaqub.
"High valuations make it difficult to find a good business at a reasonable price to buy," he said. "Your portfolio is now all about risk management, what can go wrong and how companies are prepared for those events," he said.
The Brexit vote came as a huge surprise to many but a breakdown of those who voted for it - the old, the uneducated, and those living in the provinces, reflected anger from those left behind by the economic reforms of the past 30 years, Eaqub said.
What Brexit and Donald Trump tell investors is that the people that may have been considered "losers" in society are now the majority globally and that trend will impact New Zealand as well, he said.
It has significant implications for globalisation and Eaqub said the world is heading toward "a much darker age" that is more insular and protectionist, which will affect a number of Kiwi businesses. The stability of the political system globally is going to break down and the impact of that on public policy is unpredictable, he said.
Milford Funds Management director Brian Gaynor said if Trump is elected in the US presidential election in two months, which current polling indicated was unlikely, the financial markets would become very nervous.
"We can see from the Brexit vote in the UK and the rise of Donald Trump in the US there is huge disillusionment with traditional politicians and major concerns about immigration," he said. "Next year's election (in New Zealand) will be one of the most interesting. If Winston Peters was 20 years younger and had more energy than he does he would do a lot better but he's not the politician to sustain it for 12 months."
The New Zealand sharemarket has out-performed all other markets so far this year, up 17 percent to the end of August, compared to a 5.8 percent uplift on the S&P/ASX 200 Index, 7.8 percent gain for the Standard & Poor's 500 Index, and 12 percent in the FTSE 100 Index despite Brexit. Only the European market has been negative this year.
Low interest rates and low inflation, coupled with a world awash with money, was continuing to see more investment into housing and shares but the big question is whether markets will continue as they are, climb, or crash?
Gaynor said, in his personal view, he gives a 50 percent chance to them continuing as they are for the next year, a 25 percent chance of climbing and 25 percent to them falling
"It might sound like I'm sitting on the fence but I'm saying continuing as they are is the most likely", he said.
The unprecedented uncertainty and volatility meant most fund managers were being cautious, retaining more cash and diversifying across the board, he said.
Gaynor doesn't think the NZ sharemarket is over-valued and used a driving analogy to say why the current boom is different to the last one in the 1980s.
Fund managers are now driving cautiously within the speed limits with their feet over the brake in case of a negative event whereas in the 1980s they were driving at 180 kilometres an hour with no brakes and not looking at where they were heading, he said.
Fund managers would likely use the cash they have in reserve to buy shares if the market drops 5 percent to 10 percent and help build it up again, proving there isn't some unforeseen political or geopolitical event that makes everyone nervous, he said.
Eaqub said the impact of Auckland's high house prices, which have soared 84 percent since 2007 to 10 times the average household income, is also unpredictable. Credit growth in the past year has shown the fastest-ever growth as people borrow more to fund speculative house purchases and the high prices resulting from a lack of supply.
With low interest rates, low inflation, and high asset values, the Reserve Bank has little left in the toolkit to deal with if, and when, Auckland's housing crisis peaks, he said.
The only solution is to build more houses but that also requires the government to spend more on infrastructure such as roading and public transport which has not been keeping pace with demand and the record population growth, he said.
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