Anyone following the market closely in 2018 will be well aware of how volatile it has been. The market hit all-time highs in September before major corrections which saw the markets retrace much of those gains. You can see from the tables above that the NZ market performed relatively well during this period falling back only 6% from its highs. The NZX50 cuts a fairly lonely figure being up 4.92% over the course for 2018.
There are a multitude of reasons for this, but one obvious factor is the overall lack of high risk growth stocks on the NZ market. The NZ market as a whole is dominated by reasonably defensive companies paying sustainable dividend yields. This does not mean the NZ market is without its own risks.
Internationally, the narrative of 2018 was rising interest rates in the US, coupled with tensions around trade. NZ has been relatively immune to any rise in interest rates, with our reserve bank indicating during the year that the next move could still be down in 2019. This has helped maintain the attractiveness of NZ companies (i.e. the dividend yield is still quite attractive relative to alternative investment options).
Many of the NZX50 companies are also relatively NZ focused in nature, meaning that earnings are not directly impacted by the trade tensions. Of course, if these trade tensions start to have a major impact on international trade and GDP then this will inevitably flow through to company earnings.
Looking into 2019, the same risks to the market remain. Much talk in the investment community has been around the yield curve, and the potential for it to become inverted in 2019. An inverted yield curve is a harbinger of an economic recession as it indicates that investors are expecting interest rates to drop in the future, and are therefore happy to accept lower rates on long term bonds. In a normal scenario, the yield curve slopes from lower interest rates on short term deposits to higher interest rates on long term deposits (the reflects the fact that long term bonds are exposed to more risk as time creates more opportunity for the economic environment to change).
Currently the yield curve is flattening. An inversion is a major risk to the market in 2019.
That’s not to say it’s all doom and gloom in the markets. Low interest rates still provide plenty of support, and the individual companies that make up the respective index are (generally speaking) producing the goods. The yield on offer is attractive, and most companies are achieving earnings growth.
The yield on corporate fixed interest can also be quite attractive. Contact your adviser to express your interest in upcoming bonds issues. Trustpower have recently indicated that they will issue a new bond.
We at Hamilton Hindin Greene see good value in parts of the market. Our top 5 picks of the year are below. You should talk to your adviser before including these in your portfolio.
You should also talk to your adviser to ensure your portfolio is suitable for your appetite for risk. If you haven’t completed a
financial and risk profile recently, then we strongly recommend that you contact your adviser to do so. The New Year is a good time to reassess your finances and position yourself for the year ahead.
Given that we are in a period of potentially heightened risk, now is a great time to ensure your portfolio is well balanced to ride out whatever the market throws at it.
