A Stellar Year For Equity Markets and TINA
As investors (and pretty much all of us are these days thanks to KiwiSaver) 2019 has seen share markets around the world hit new highs throughout the year and increases year to date have topped 20%. In the USA the S&P 500 which is a broader measure than the more commonly known Dow Jones Index is up an incredible 22.7%. While closer to home our own NZX50 is up 24.4% since the start of the year.
However, it hasn't been all one-way traffic. On two separate occasions the S&P 500 had retraces of over 7% in the same period (nearly 11 months as we write). This indicates a market that is both bullish and volatile.
Experts continue to be confounded by the length and strength of this market (an 11 year bull market and counting) and how skitterish it can be.
Two things ultimately drive a market: fundamentals (actual company performance - growth and profits) and investor sentiment.
Companies in the USA report earnings on a 3 month cycle. It is interesting to watch the sentiment towards those companies that don't meet forecast. Investors can be quite savage and some shares have seen falls of over 30%. Other factors that affect shareholder sentiment are some of the macro issues that now pervade the world and these include but are not limited to:
- International trade and tariff impositions (think USA v China)
- Politics - investors like stability (think Brexit or Impeachment)
- Employment - more jobs means more income and less social security benefits (NZ and USA unemployment numbers are historically low)
- Consumer spending - particularly in the USA this now drives a significant level of economic activity
- Government budget deficits and total debt - not many countries are living within their means meaning more borrowings
- Interest rates - despite starting the year at historical lows we have seen interest rates move even lower
Across the globe not all of these factors are necessarily in favourable territory for a continued bull market. For example, the low interest rates are a conscious effort by governments to maintain economic activity to avoid world economic growth from stalling or becoming recessionary. In some countries interest rates have fallen to 0% and, or turned negative!
So why the continued enthusiasm for equities - well the new acronym in investment circles is TINA - There Is No Alternative.
This is not hard to see. If we limit ourselves to looking at the local market there are marginal returns to be had from alternative investment categories - property, deposits and bonds.
Property investment presents issues with either liquidity or minimum size of investment. If you are a direct investor getting a deposit together is challenging and then liquidating or selling your investment has possible time delays. In recent times there have been further challenges that altered investor sentiment:
- Bright-line tax rule for residential investment property held less than five years
- Tax Working Group that considered a Capital Gains Tax (now abandoned)
- Restriction on Foreign Investors
- Reserve Bank limit on lenders in respect of Loan-To-Value ratios
This caused a stalling in what had become an overheated domestic property market.
Within the Term Deposit and Bond Market we have seen falling interest rates hit below 1% for short term deposits. While the reduced interest rates have been welcomed by those with a mortgage the retirees living off their past savings have struggled to even keep up with inflation let alone generate a surplus to live off.
The upshot has seen many flood the share market looker for higher returns through share price growth or chasing high dividend yielding stocks - think banks and electricity companies.
Electricity companies or utility suppliers are usually seen as long-term stable investments. However, we have seen increases in their share prices of up to 40%. They are still forecasting annual dividends in excess of 5%. While this has become a “bond proxy” investment it does leave the investor subject to share price fluctuations which affects their capital. We recently saw a sell off across this sector when the aluminium smelter in Southland suggested closure was an option. The smelter is the biggest user of electricity in New Zealand taking up 13% of all generation.
The TINA investors are now spooking the market analysts who are now seeing shares trade at historically high prices relative to corporate earnings suggesting the market is now overpriced.
The likelihood is there is probably more upside as some uncertainties may be removed. At some stage we will be in a post Brexit environment, China and USA have indicated they will tackle their trade issues in phases and a wind back of tariffs is to occur. The average family in the USA has seen an increase in household income of approximately $6,000 per annum in the last three years and this will continue to fuel consumer confidence and spending as well as GDP growth.
On the downside, as we all have come to learn, a market correction is probably only a tweet or international terror event away. The returns enjoyed this year are only locked in if you take some of your money off the table. The question is, if you do so - where would you put it? Repayment of debt is always a viable option. Debt is a real number while asset prices vary with sentiment and based on what someone will pay today.
Whether to do so, or not, might be tied to your age and retirement aspirations. At the very least we should all temper our long-term expectations on how our investments will perform. A recent report I read suggested that an average return of just over 4% per annum for the next 10 years would be acceptable.