Money 2013: Change of fortune

by Pattrick Smellie / 28 February, 2013
The global economy looks set to finally get going again, and this means new rules for what to do with your hard-earned savings.
Money 2013
Photo Getty Images/Listener photo illustration

High above the Wellington waterfront, Harbour Asset Management managing director Andrew Bascand gets a bird’s-eye view at work every day, the ridges of the Orongorongos picked out like a serrated knife, the Wellington skyline uninterrupted by a single construction crane.

One of New Zealand’s cannier fund managers, managing around $1.2 billion on behalf of other professional investors, Bascand looks out at the world economy and sees something akin to Boeing’s 787 Dreamliner jet: it looks okay but there’s probably something wrong with it.

Still, compared with the global economic train wreck of the past four years, that’s still good news.

Mind you, Bascand’s optimism is hardly unqualified. The richest countries are still printing money to try to stimulate their economies, which are proving slow to respond. The “velocity of money” in the global economy remains slow. Debt has become a dirty word after the wild ride of the past 10 years.

“We haven’t solved anything, but 2013 doesn’t look like the year that those chickens will come home to roost.”

In fact, 2013 looks like a year when the global economy will get its ducks in an admittedly slightly feeble row and show some consistent growth, driven by a strong upturn in the US economy, a recovery from last year’s speed wobbles in China, perhaps a resurgence in the long-moribund Japanese economy and greater stability in shaky Europe.

Sure, the UK lost its AAA credit rating, but at least there were no riots. I’m amazed we’ve got through another European winter without civil unrest,” says Bascand. Despite the percentage of unemployed being in the high 20s in some southern European economies, he sees 2013 as more promising.

“We’ve had three years of European crises, and maybe we won’t have one this year.” More likely than further crises is a prolonged period of sub-par economic growth accompanied by slightly higher than usual inflation, which will help eat away the massive additional debt created around the world in the past five years.

Closer to home, New Zealand’s most important export market, Australia, could surprise this year. Bascand believes the Australian central bank made a “policy mistake” by being the only developed country to raise interest rates since the global financial crisis. It dropped them last year and now the Australian economy is coming back more strongly than many have picked.

This range of international factors matters for one simple reason: where the world goes, New Zealand follows. So, though the political mood is overshadowed by the recent string of major corporate job cuts, the mood among investors is strengthening.

Look no further than February 22, the day Telecom announced the likely loss of hundreds of middle managers’ jobs. For the first time in a month, the NZX 50 Index of leading stocks broke through 4200, as investors applauded overstaffed businesses announcing plans to improve their earnings.

“People aren’t spooked, because they see it as a company moving from a telco to a mobile and data-services company,” says professional investor Aaron Bhatnagar. “Investors like certainty. If they see a strategy being executed, they’re fine. It’s when a company goes around cutting jobs and doesn’t seem to have a plan that they worry.”

Cue similar investor plaudits for job cuts at Contact Energy and Fletcher Building.

Behind this gloomy-looking headline environment, Bascand sees something quite different in the New Zealand economy. “Everyone I talk to is looking to hire.”

Aaron Bhatnagar: “Whether we’re at excitement or optimism, you could quibble.”
Aaron Bhatnagar: “Whether we’re at excitement or optimism, you could quibble.” Photo/David White.


Meanwhile, depressed interest rates have been spurring a lurch back to the sharemarket, which saw New Zealand shares add about a quarter to their total value last year and continue to move up this year.

Referring to a widely quoted chart of the “point of maximum financial risk”, Bhatnagar can plot New Zealanders’ investment sentiment moving from “capitulation” some time in 2008 to “depression” by about 2010, “relief” by late last year and now optimism.

Beyond that lie excitement, thrill and then euphoria, which is at the top of the curve and is definitely a bad time to invest in anything, since it usually precedes the next downturn.

“Whether we’re at excitement or optimism, you could quibble,” says Bhatnagar, although even this optimist won’t rule out a bout of anxiety or two in the months ahead. “Famous last words.”

Even so, he finds a way to be upbeat about the swift cooling of sentiment that accompanied a lot of ho-hum half-year company profit reports in the past few weeks.

“People are keeping their feet on the ground,” says Bhatnagar, who travels the country checking out firms he might like to invest in – a tactic he recommends to anyone. “Do your homework. Pick up the phone and talk to someone about the company. They love to have private investors come and ask them questions.”

At the “microlight over the Canterbury Plains level”, Bascand’s view is also optimistic. The New Zealand economy is in for a growth spurt based on a global economic recovery and the Canterbury rebuild – job cuts and a high Kiwi dollar notwithstanding.

However, New Zealand’s capital markets remain perilously thin – the lack of good opportunities for sound investment in blue-chip shares is a stumbling block to investors seeking greater sharemarket exposure without going offshore.

However, last year’s listing of the Fonterra Shareholders Fund showed there’s strong local appetite for high-quality offerings.

With cash washing out of low fixed interest rate investments for some time to come, it’s no wonder the Government is so keen to get at least one or two partial privatisations away this year.

More to the point, its determination to “put New Zealanders at the front of the queue”, combined with various foreign and other ownership restrictions, means these shares are likely to be keenly priced.

And for all the talk about low demand growth and downward pressure on electricity prices, the energy companies are proven cash cows, offering solid dividend streams as well as some prospect for capital growth – especially as foreign investors will be eyeing the local part-privatisations for bargains.

All in all, for the average New Zealand investor, you could do a lot worse this year than investing in the company that sends you your power bill.

Money 2013

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