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Investing

The Immediate Economic Future Of NZ

In April I wrote an article about the economic future of NZ, in which I postulated that the economy could be changed for the long term and we could see some new / increased taxes in the future. Specifically, I believe that we are looking at a Capital Gains Tax (CGT) because it’s already popular with some folk who believe there’s a fairness issue at play, and the NZ government has a history of looking abroad for policy ideas (rightly or wrongly).

I’m not ready to revisit the accuracy of my predictions because things haven’t had time to play out yet, but I would like to take the opportunity to offer my thoughts about the immediate future of the NZ economy. I won’t cover the state of play currently, because that’s already covered very well by the likes of John Ryder (which I recommend you subscribe to), various sources of stats, and the general media. Instead I would like to offer my opinion of the share market recovery and whether it’s currently a good time to be investing / trading.

I recently read a very interesting opinion piece in Stuff about mortgage holidays, which I think gives insight into the timing of the bear market. To summarize the article, 114,000 people are experiencing post COVID-19 lockdown hardship and 52% of these have been given a mortgage repayment holiday by the banks. These mortgage holidays will be expiring after 6 months (September through December), at which point people may be entering positions of financial hardship in which they do not have the means to support themselves.

This will be coming into Christmas when people typically spend more money. Without this extra spending, businesses will struggle through the traditionally quiet months following Christmas. I suspect this grim time for business will cause us to see more business closures and job losses in early 2021.

Therefore I think the recovery we have seen in recent times will likely recind towards the end of the year, and we will once again be in a bear market coming into 2021.

That said, much of NZ’s tiny economy relies on trade with larger foreign economies, so perhaps a better way to predict the economic future of NZ would be to predict the economic future of larger, foreign economies such as the USA, China and Europe.

In any case, I think that it is wise for investors to be divesting and saving their cash for a real, full recovery; traders should cautiously enjoy the volitility as they always do; and employees should enjoy as much security as they can, by working hard to ensure the success of their employer and saving money in case things don’t go well.

Things To Remember About Stock Prices

It’s better to invest in bull markets than gamble by buying stocks selling at a fraction of their former price in the hope that they will return to previous values. It’s worth remembering that a stock that halves in price has to double in price to reach it’s previous value. For example, a stock that was a dollar has to fall by 50% to reach 50c, but a 50c stock has to increase by 100% to reach a dollar.

Buying during a bull market gives confidence that prices will continue to rise and is a safer investment which will be a better investment over a period of years. For example, an investor would rather be guarranteed 30% ROI per annum compounding for 5 years, than a year of the posibility to get 100% without any certainty, but at the same time have the risk of losing 50%. So be careful what you wish for if you are hoping stock prices will fall.

It’s also worth remembering that stocks aren’t “cheap” because they are selling for half their current value. A stock’s price is based on the company’s capacity to earn money, which may then be returned to stockholders in some fashion (which is how the stock price is derived – it’s all about ROI on your investment).

How To Invest

There’s a lot of stuff going on right now: turmoil in the USA with racial/police problems, riots in the streets, and COVID-19 out of control. Thinking about this calmly and unemotionally, these things probably won’t effect the economy. What will effect the economy are the trade wars happening with USA-China, trade issues with Oz-China, lockdowns in the USA, the effects of the previous lockdowns effecting tourism, the aviation industry, subsequent job losses, the prospect of falling commercial property prices as people work from home and businesses close, the prospect of falling residential property prices from reported economic hardship, the corresponding reduction in equity and borrowing capacity from falling property prices and the effect that will have on spending. The potential for governments to become financially over extended from stimulus packages could cause future taxes and austerity measures that would be detrimental to the economic recovery.

On the flip side there are massive stimulus packages.

Over all, I feel that this year is a good time to cash up if you can. I think that retail stocks carry particular risk because people will be saving, spending at Christmas will be low and the following months will be baron. I think that tourism and aviation will continue to struggle, and Oz mining stocks (and general economy) will suffer from the current relationship with China.

Generally there is a lot of risk in the market, and given the liquidity of stocks there is no need to take on the risk of investing right now. Trade as you will if you are a trader, but I think it’s currently a bad time to be investing. If you are intent on investing, I have mentioned that Ebos are well priced right now, Scales and A2 Milk are probably about fair value (apologies for the old analysis in the link), though there will possibly be better times to buy later next year (less risk, but with less gains). There may be some bargains available in the residential property market in coming times – which is probably the best bet given lower interest rates.

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