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The economic outlook is relatively good, despite unemployment and the exchange rate.
Perhaps summer makes people more positive. There seems to be a lot of optimism about, which bodes well for the year financially and economically.
Southern Europe’s economies still look decidedly shaky: Greece is just managing to avoid default, and it and other countries have worryingly high unemployment – especially among their young.
But the United States is starting to move out of its long torpor. The uncertainty that prevailed before the presidential election has gone, and although the Republicans and Democrats continue to bicker over tax policy, their arguments won’t put too big a brake on the economy. Australia’s main problem seems to be its strong dollar, but its mining-based exports are picking up, especially to its (and our) big trading partner China.
Our Government has done some ministerial spring-cleaning and seems more focused on getting the economy moving up a gear or two than on political point-scoring and the noise created by interest groups. Our economy is looking relatively good. Interest rates remain low and commentators are advising people to switch at least some of their mortgage debt to fixed terms to lock in rate certainty, even though no one is picking the Reserve Bank will raise rates during the year ahead.
The exchange rate is a challenge for exporters but good for importers and consumers. Unemployment is still higher than we’d like, though at least the Government is putting more focus on it with ideas such as the apprenticeship lure announced in late January.
This will hopefully be the year that Christchurch’s economy finally comes alive, assuming some insurance blockages paralysing house-fixing and rebuilding are finally cleared.
Property sales in places other than Auckland have picked up, and more people are opting for auctions, which suggests there’s competition for properties. But gross domestic product growth remains very sluggish.
The local sharemarket had a great year in 2012 – the NZX 50 Index of the 50 biggest companies rose nearly 25% – and it remains strong. Sharemarket performance is traditionally an indicator of broader economic performance. I have less faith in that rule nowadays, given the sharemarket’s much-reduced importance to the economy. Most people consider it irrelevant – a real worry given its role in boosting investment and jobs.
KiwiSaver has helped ensure some local money goes into shares rather than property, but we remain mostly uninterested in equities. Our sharemarket is worth less than a third of the value of our GDP, down from being about 90% in the late 1980s. It’s no wonder GDP growth is so tepid. Sharemarkets are economic growth engines and ours is no Mack truck; it’s barely a 50cc scooter.
That’s causing problems. The power company floats might not find local support from government- owned institutions like ACC and the NZ Superannuation Fund because they are already near the level – just shy of 10% – that they think prudent.
I guess that leaves more for the rest of us. KiwiSaver funds will probably invest in the power companies, along with a declining number of individuals brave enough to make their own investment decisions. Overseas institutions and companies might also top up their involvement in our local market after having significantly reduced their holdings since the days they bought in strongly during the 1980s and 90s floats.
Bonds are unlikely to be stellar performers and the Reserve Bank doesn’t want property markets to get too steamy, so more people might think it’s the right time to get back into shares.
Just don’t assume everything is worth buying. Some shares look pricey after their good run, but based on improving economic fundamentals and individual company prospects, there will be plenty worth having.
Before buying, look at the basics: what are their expected profits relative to their price? If shares are trading at a premium or discount, why? Most important, look at the skills and experience of the people at management and board level. They will be looking after your investment; can you trust them with your money?
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