Where inflation is concerned, there are aspects of global inflation and domestic inflation in countries around the world. While no country can control global inflation (except perhaps those who control oil supplies), each country can make a significant impact to it’s currency, economy and citizens with the proper handling of inflationary and dis-inflationary policies.
It seems that inflation in the US and Australia is abating a little, but inflation in NZ is not. Looking at why this is, we have to understand that domestic inflation is affected by not only Reserve Bank policy (OCR), but also government policy. The problem as I see it is that the government has and continues to impose inflationary policies upon the country. Here are a few such policies:
- Government imposed fees on car imports has increased, making cheap cars expensive to import.
- Farmers have been punished unduely for emissions, pushing food prices up.
- RSA workers have been stopped from entering the country so crops are upable to be harvested, pushing food prices up.
- Oil exploration has been banned, meaning that less oil is supplied and pushing prices up.
- Increased government spending, creating demand and giving people more money to spend.
- Increased unproductive government jobs, giving people more money to spend.
While the government seem to have started to address some of this (cynically I would say as the election that they’re highly unlikely to win is approaching), I feel that until this current government is removed from power domestic inflation will remain strong. What’s concerning about this is that this increases the OCR further, putting strain on the economy and increasing the Risk Free Cash Rate, making valuations lower. As an investor looking for reliable retirement income rather than a trader looking to make money on asset values, I used to think that asset values (i.e. share prices) didn’t matter if they dropped below what I paid. However, this can be a problem if I’m forced to sell such an asset (perhaps due to lack of performance) because I will basically decimate my income capacity. This is particularly a problem because the current governments policies are anti-business as well as inflationary – reducing the value of investments and increasing their risk contemporaneously. Therefore I have decided that I cannot invest any more money in NZ, at least until the government is changed and a recovery is assured.
This line of thinking has made me explore other options. Firstly in Australia because there are investment opportunities there that aren’t subject to FIF Tax law (one of the goals of my investing for the past few years has been to simplify my tax returns, which is one of the things that attracts me to investing in NZ and has caused me to avoid investing abroad despite the prospect of bigger returns – much to my disappointment!). The problem with Australian securities is that they are taxed in Australia, and then again in NZ. This means that they are 33% more expensive, making valuations highly unfavourable for me.
Secondly, this has caused me to re-research the FIF Tax laws to open up investment in US stocks. The problem with this is the tax basically taxes you on the assumption that you’re getting a 5% dividend – which means that income growth stocks (required for a retirement income to stay relevant to inflation) are over taxed and therefore not viable in a retirement income portfolio such as mine. The other option is essentially paying tax on theoretical (paper) gains based on the price at the start of the tax year vs the end of the tax year. While that sounds fairer, it means that as stocks grow in value (which they must to stay ahead of inflation, to be in a retirement income portfolio), I’d pay more tax that I could possibly earn in dividends. The only way to pay such a tax would be to have a cash reserve on a term deposit (basically un-invested and losing money in real terms) or sell a portion of my shares each year (a yearly loss in terms of the percentage of the companies I invest in and my relative position in the economy – aka inflation loss, of sorts).
At the moment I’ve decided to keep my debts down, holding my current course since my last strategy review. I will reassess the situation in the new tax year and as the inflation situation evolves. I’m concerned that NZ’s poor performance will force me to invest elsewhere, causing me to take my income from capital gains in US stocks taxed at a theoretical dividend rate (what the IRD calls the FDR option in the FIF Tax), at least until NZs economic and political environment become more friendly to businesses and investors.