7/17/2020 12:00:00 AM

Investor Update (17/07/20)

Dear Investor,

Welcome to the July video update.

We were joined by Mark Devcich and covered off these questions:

  1. Interest rates - how low can they go?
  2. We're seeing a lot of enquiries from clients looking for a higher return than term deposits are currently offering.
    Are we seeing more money flowing into the share markets?
  3. It’s difficult to time the market. What approach are we taking at the moment?
  4. What are the alternatives to term deposits, and what are the pros and cons?

We have also included a transcript of this update below.

Kind regards,

Mike

MIKE TAYLOR
Founder and CEO


 


Written version

Sam De Court: Hi everyone, my name is Sam De Court and thanks for tuning in today. With me I have Mike Taylor and Mark Devcich. Hi Mike and Hi Mark. So Mike, you've just returned from school holidays. Did you do your part to help New Zealand tourism operators and did you see a bit of the country?

Mike Taylor: I saw a little bit of the country. Part of that Sam was just driving from Hawke's Bay to Auckland. But I stopped off in Taupo on the way. I took the kids to a few things up here like Kelly Tarlton’s, Sky Tower, Snow Planet, stuff like that. So, spent a bit of money in the domestic economy.

SDC: Spent some time in crowds as well no doubt.

MT: Some of those places were a little bit like bedlam. A lot of people.

SDC: Good to hear. All right, let's get started. So Mike, interest rates is a big topic at the moment. What's your view on interest rates, and how low can they go?

MT: Well probably not a lot lower, since they're already pretty low but the base case, at the moment really is interest rates around the globe, but let's focus on New Zealand, have probably bottomed out - for the moment.

And that's on the view that the economy's bottomed out in April. And we're on the road to recovery. Yes, that might be bumpy along the way, but that's the general view and probably in that scenario, we'll see interest rates flat for a while, and then drift a little bit higher in 2021 as the economy grows. So the Reserve Bank will be trying to keep rates down. They’ve already indicated that and that's what the Kiwi programme is for. So, we shouldn’t expect them to rise too much.

There is of course a downside scenario, which has been discussed by the Reserve Bank, which is negative interest rates. So if the economy deteriorated further than what everyone's forecasting at the moment, that might mean that the Reserve Bank has to go to negative interest rates. If we got negative rates, then possibly we could see mortgage rates fall another half to 1%, so that's like one and a half to 2% for fixed rates - that would probably be a downside scenario.

SDC: Thanks, Mike. And Mark over to you now. So we're seeing a lot of inquiry from clients looking for a higher return than term deposits are currently offering. Are you seeing more money flowing into the share markets?

Mark Devcich: Yeah, I think we are. We’re seeing a lot of mum and dad, or retail, investors into the market and quite often, for the first time as well. So the best way to track this is the number of new brokerage accounts and there's a number of new providers such as Sharesies in New Zealand. There's a company called Self Wealth in Australia, and a large company called Robin Hood in the US. And pretty much all of them have an app and allow easy access to the market, and I think it's a combination of investors looking for a return -  so, like you said, term deposits are extremely low, the property market is out of reach for a lot of investors now given it’s so high, so they need to get a return from elsewhere. And a lot of people are looking to the stock market for that.

And then the other element, I think there's an element of speculation, so you could say there's been no sports on, no casinos open, so people can’t bid or gamble as much as they used to. So they're now gambling on the stock market and we are seeing a bit of this like, for example, Robin Hood. Just on Monday, they had 40,000 people buy Tesla shares in four hours, and that sent the stock up 16%. And then, just by the end of the trading session, a few hours later, the stock had closed down 1%. It had fallen 17% off its high during the day. So that's a good sign there's a lot of speculation in the market and Robin Hood investors, they're actually trading 40 times more than a traditional brokerage customer for someone like Charles Schwab in the US. So, there is an element of kind of overtrading and speculation that I think a lot of new investors to the market are doing right now.

SDC: Thanks Mark. In the last newsletter you talked about how difficult it is to time the market, and obviously the Covid crash and recovery’s been a good example. And we're seeing more of these articles from other sorts of investment professionals. What approach are you taking at the moment?

Mark Devcich: Well I think firstly, asking someone whether they can time the markets is like asking someone if they're an above-average driver. Everyone says they are, but statistically, that can't be the case. So, it's very difficult to time markets because there is just so many variables and then you've got to predict the variables correctly, and then you've also got to predict how the market will react to those variables

So I remember during the lockdown - this is something that we got a little bit wrong. Every Thursday is a jobless claims report out in the US and every week we were anticipating that there would be record amounts of jobless claims, and pretty much we got that right. Every week for a number of weeks, the jobs report was worse than expected. And we were thinking the market would sell off but the market actually rallied every time on this because even though the economy was getting worse and more jobs are being lost the market anticipated that there'd be more Federal Reserve stimulus coming in to support the economy, and that actually boosted the stock market so it's very difficult to predict the markets. We think it's better to just focus on picking stocks so there's less variables to consider.

And over the long term, it’s not so much when you buy but it's what you buy. I was reading a study recently and basically what you need to do is kind of firstly try and pick those companies that are going to survive through the market cycle. So make sure they haven't got too much debt, make sure they're not going to be disrupted from other companies or various forces, and then once you’ve got that part, you want to pick the companies that can thrive and those are the companies that are going to compound capital a lot faster than your average company.

And so this study, what it said is they looked at stocks from 2007 to 2017 so a 10-year period included the GFC. What it found was 42% of companies actually outperform the market, they returned 11.6% versus the index of 7.3%. But if you look at the top 25 companies they actually returned 1,336%. So, 1,336% - that’s a huge return, and it shows, if you can just pick the right companies, it's not so much when you buy them but what you hold and that's the key to doing well in the stock market.

SDC: Very interesting. Mike, back to you now. So let's bring it back to term deposit rates.

Can you maybe talk a little bit about what the main alternatives are to term deposits. And what are some of the pros and cons of those?

MT: It's always been attractive for Kiwis to park money on TDs, because traditionally the New Zealand banks have paid quite good rates for deposits. Obviously a decade ago they were 8% and even a few years ago they were close to 5%. Now you're looking at rates in the 1s. And if you've got money on short term or even on call, it’s basically zero. So that means that you've got to look at an alternative to drive some kind of return. So the first thing that people might look at is, ‘Well, should I go into shares? Should I buy a property, or should look at fixed interest?’. But actually probably all of those particular options are not really suitable for someone who is looking for an alternative for a term deposit.

Shares for example, carry too much volatility and too much risk, versus cash. Property has got these issues in terms of you've got to find something to buy, you’ve got to have tenants, you've got to maintain the property and you’ve got to manage your mortgage, so there’s quite a few things involved with a property.

Fixed interest as well - not as easy as it might seem. Bonds can move up and down in price, particularly with rates so low, if there was a recovery, you potentially might lose money from having a bond that might only be paying you 2% anyway.

So, what’s sort of an alternative? I guess there are a lot of providers out there, such as Pie who offer conservative funds. What a conservative fund does is it gives you slightly more risk than a term deposit, but it is spread across a number of different assets including a little bit of shares, a little bit of fixed interest, sometimes property, and cash as well.

The main benefit of having an investment in a conservative fund is liquidity. So you can actually get money out normally in a couple of days. So, if you want to go into a term deposit typically you’re locking into six to 12 months, maybe even longer than that, versus a conservative fund that could be out in two or three days.

Sure a conservative fund will still move around a little bit, but in most cases, you should be able to derive a positive return, unless it's exceptional circumstances. And that return should be better than a term deposit so I would say that conservative funds are probably the best alternative for someone who doesn't want to be in a term deposit anymore.

SDC: Well thanks for that Mike, and thank you very much, Mark. Thanks everyone for watching and we look forward to seeing you in a month.


To download our product disclosure statements, go to www.piefunds.co.nz.  Past performance is not an indicator for future returns. This information is general in nature only. Before relying it on it, we recommend you discuss with an expert