Some need to know, with a bit of WealthDesign nice to know thrown in.

What’s happening to our rock star economy?

Let’s face it – the economy has been great.  The New Zealand Listed Property sector returned around 35% last year, and the New Zealand share market around 18%. So if the market comes back a bit, it’s hardly a surprise.

In lots of ways, New Zealand is a micro climate that mirrors what’s happening globally. Economically we have had a sunny financial period for over the past 10 years. This great economic period has been based on cheap money due to quantitative easing. This was part of the answer to the global financial crisis. Quantitative easing is basically central banks of Europe and the US, printing extra money. This increased money supply has seen interest rates fall globally to historical low levels.

This cheap money has also seen all capital assets (such as shares and property) strongly increase in value over the past 10 years. Employment and business confidence has been strong as we have all felt wealthier and more confident. This has lead to us all spending more and the economic treadmill has been spinning overtime.

Unfortunately though, things aren’t all rosy out there. We are seeing redundancies in the rural support industries as farmers put their cheque books away. The banking industry is starting to put the squeeze on farmers and businesses. I am getting calls weekly from individuals telling me that the bank is limiting access to funding. This isn’t entirely the banks’ fault as the New Zealand Reserve Bank is leading the charge with talk of increased capital reserves and favouritism towards residential mortgages.

In my opinion, we are also seeing extremely poor leadership from politicians, both locally and on the global stage. You only need look at the US or UK to see what I mean. Short term populist thinking isn’t helping the potential economic disaster that could be building. A great example is what is happening in the US. I think a lot of why Trump can get away with his trade war is the underlying belief that somehow China’s success is America’s loss.

We do expect the markets to become more volatile in the near future. This is going to create opportunities to make money. It’s a story I’ve been telling my clients for a couple of years now – “keep some investment money as cash!” That way, we’ll be able to take advantage of the opportunities as they appear.

An example would be Z Energy (ZEL). Two years ago ZEL was trading at $7.70 per share. Today it’s trading at $5.62 per share, with a gross cash dividend of 10.66%. At these rates, this is a great buy. Has anything changed with ZEL as a company? Well nothing apart from it becoming a political football (as the government tries to deflect criticism of their regional fuel tax they have added to our fuel costs).

ZEL is a truly integrated utility organisation, from refinery to its sale of 45% of all New Zealand fuel usage. It is profitable and well run, yet market sentiment has forced the price of this stock down around 13%. 

If you bought your ZEL two years ago and then doubled up your investment today, your average cost per share would be $6.70 per share. This would still mean you are earning a 9% gross dividend on your total investment. Not bad considering term deposits are at around 2.8% for 12 months.

Another example would be Metlifecare (MET). Today this share is trading at $4.47, down around 30% for 12 months. MET is trading at basically a 40% discount to the NTA (net tangible asset value) of the company. Think of a company’s NTA as the zombie value of the company. It is the value of the assets if the company died and went broke, and the assets got sold off. To be able to buy a company at 60% of their underlying asset value seems an amazing deal to me. The retirement sector isn’t going away. Today, people 75 years old and above make up around 7% of the population – this will grow to around 17% of the population by 2040.

I believe the next 12 to 24 months will provide an opportunity for informed investors to make a lot of money. But there are a few things I would advise:

  • Have a strategy in place for the coming volatility. This might include taking profits and moving into assets you can see and understand. I’m not a great fan for managed funds where you don’t know where your money really is invested.
  • Don’t ever delegate the decision of where you invest your money. It’s your money and you need to have control.
  • Never give your money to someone who controls the cheque book. Don’t ever give your money to anyone who can’t prove that the money can’t be misused or accessed by a third party. Keep the ability to sign off any change and never delegate this to anyone.
  • Don’t follow the crowd – what happened last year doesn’t mean it will happen again this year.
  • If you do use a managed fund, be sure you understand the structure and the assets you are investing into. You need to understand how the fund is benchmarked, how much cash the manager can hold, and how far away from an index they can be within the fund managers’ rules. Interestingly this isn’t that easy to find out from straight research. It takes a bit of digging.
  • Understand the fees you are paying. We often see people paying up to 2.75% of the total portfolio value in fees.

If you want to talk to me about investing or you would like me to review an existing investment portfolio, give me a call. I will happily meet for a free initial investment chat.

 

John Barber
WealthDesign – a life well planned

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As good as gold ….

Today I had an interesting call. A lady rang to ask me how to invest in gold. She told me the story of her very affluent grandfather, who had always told her to buy gold as a way of protecting her wealth.

Her question was how to do it. Should she buy into a managed fund that buys and hopefully actually hold the gold, should she buy an ETF that is linked to gold prices using financial derivatives and futures? Or should she cut out the middle man and buy shares in a gold mine, or should she buy the real thing?

Gold prices have surged in recent weeks on the back of buying pressure by India and China. Uncertainty around the global trade war has investors spooked and moving into gold as a hedge to protect their wealth.

In my opinion, gold is like buying a residential section. The only way to make a profit is to sell it to someone else for more than you paid yourself. If you hold the section for 10 years and the cost of money is 3.5%, your section needs to increase in value more than around 50% to make a profit. Why, because the section doesn’t produce an income, just like gold. All the profits must come from inflation and there is a cost of not getting a regular return. This is called the opportunity cost.

If we don’t get gold inflation, we don’t get a profit.

My advice around owning gold was simple. If you really want an exposure to gold, take a visit to your favourite jeweller, buy a beautiful 24 carat gold necklace and keep it safe. Insure it and wear it out. Enjoy the tactile feel and the warmth of the gold and the joy of owning something so lovely. Even if you don’t get inflation that pushes up the value of your beautiful asset, at least you get the joy of owning it.

John Barber
WealthDesign – a life well planned

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We don’t know what we don’t know

Unconscious incompetence – yes, it has a name! We just don’t know what we don’t know and it can be dangerous, especially when it comes to insurance.

For example; people who buy their air flights on their credit cards and expect everything to be covered on their free credit card cover. In a lot of cases this may be okay, but not in all cases. If you are over 75, your cancellation cover is limited to $5,000. A bit of a problem if you have booked a 17 day tour and it cost $14,000, or worse still if it’s a world cruise, with the cost being around $80,000.

A couple of years ago I was stuck in the United States for a few extra days due to a major storm. Missing connections is almost the norm when you travel these days.  I had Comprehensive Travel cover, with a $15,000 limit. If I’d relied on the free cover on my credit card, the limit is around $2,000 – which would’ve left a short fall, and left me a stressed out traveller!

This applies to life insurance policies too. At first glance, they all look the same, but once you lift the hood, you find there is quite a difference between companies and covers. You don’t want to be the person who has paid the cost of the cover for years, only to find out when you need it most, that you have the one policy that doesn’t cover your situation (unfortunately we see this often).

My advice is always – get advice! Insurance is for disasters, and you want the peace of mind that you have the right cover at the right time.

Do you want to move from unconscious incompetence to conscious competence? At WealthDesign we make the complicated simple, so give us a call and see how.

 

John Barber
WealthDesign – a life well planned

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Wall of debt coming – be prepared!

Today the world debt is US$217 trillion – and we should all be preparing for what that means.

10 years after the end of the great recession, the world is still a volatile place for investors. We have seen asset values continue to rise on the back of historically low interest rates.

We now seem to have asset bubbles in property, and in world share markets. This is on the back of the world reserve banks printing money. If money is cheap to borrow, it is only prudent for businesses and individuals to borrow and buy assets.  As the money supply has expanded and invested, then we’ve seen asset prices around the world grow.

To make things worse, the historically low interest rates have created “zombie companies”. These are companies only being kept alive by the low interest rates. In the US, 10% of the businesses are classified as zombies. If we see a 2% increase in interest rates, these companies will be killed off.

The impact of low interest rates doesn’t just impact on the share market, but it also impacts on the bond market. Since the global financial crisis, global credit has boomed. In the US, 49% of the corporate credit is BBB. This US $5 trillion is one step away from junk bond status. If a down grade comes, these company bonds will be sold off in the millions. To make things even more complex,  US $0.5 trillion of this debt is due to mature in the next three and a half years.  This has serious implications to us all as every recession is preceded by a bond crash. This is where interest rates increase and bond values fall.

New Zealand might be at the end of the world, but our financial stability is fragile. As a country we are tiny, and if the US economy sneezes, our economy will need to head to intensive care.

In 2001 we had the DOTCOM bubble and I remember reading about it the day after most of the news hit. In 2007 we read the news on the internet, but next time we are going to be reading the news at real time on our phones.

With three million people invested in KiwiSaver schemes, and most of them not taking advice, when the bubble pops, it is going to be an interesting time.

So here’s me shouting from the roof-tops:
GET SOME ADVICE TODAY!
Honestly guys – this is important. For your financial future (and your family’s) be well prepared for whatever is coming up. Give me a call today to make sure you have your KiwiSaver scheme set up optimally – it’s really not that painful, I promise you!

John Barber
WealthDesign – a life well planned

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AMP sells life insurance business

AMP has agreed to sell their life insurance business for $3.3 billion to Resolution Life.

Resolution Life is an investment company that specialises in buying “legacy life insurance” books. The company has 27 life insurance companies that they manage in the UK, US and Europe.

Obviously, they want a return on their $3.3 billion investment, and I don’t believe that AMP policy owners will benefit from this deal in the long term.

Historically, AMP policy owners shared in the profits of AMP, by way of bonuses on whole of life policies. Since listing, the bonuses have continued to be eroded by a number of changes. Many of the changes are hidden from view.

If you have an old AMP policy, I suggest you get advice from an experienced adviser who understands AMP policies, and who isn’t conflicted (as an AMP agent is). And that someone could well be me. I’ve been in this industry for thirty years and have a comprehensive policy knowledge of all AMP policies.

Give me a call, and I would be happy to give you the impartial advice that you need.

 

John Barber
WealthDesign – a life well planned

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