Politics to dominate in 2017 - News & Views December 2016 - Craigs Investment Partners
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News & Views
December 2016
Politics to
dominate in 2017
M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 1 29/11/16 2:43 PM
Craigs Investment Partners
Private Wealth Research
Mark Lister
Head of Research
Deidre Copley
Head of Fixed Income
Michelle Perkins
Senior Research Analyst
Frances Sweetman
Senior Research Analyst
Robert Blews, CFA
Senior Research Analyst
Peter Ball
Research Analyst
Roy Davidson
Research Analyst
Nachi Moghe, CFA
Research Analyst
Cam Watson
Quality of Advice Manager
Prices as at Wednesday 16 November 2016
unless otherwise stated.
2/ News & Views December 2016
M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 2 29/11/16 2:43 PM
Contents
Portfolio strategy
My 2017 investment to do list 3
Politics look set to dominate: Key investment themes
for 2017 6
Investor implications of a Trump Presidency 14
Should investors be worried about the outlook for
local shares? 16
Fixed income: Trump election will see higher global
interest rates 20
Are equity markets pricing risk correctly? 24
Introducing three new Australian growth ideas 30
India for the long-run 32
Equities in focus
New Zealand equities 34
Australian equities 36
Listed property 38
Investment trusts and ETFs 40
Global equities 42
Regular information and data
Strategic asset allocation 44
Sector preferences 46
Building balanced portfolios for income, growth
and safety 48
Understanding our recommendations 49
Our services: A short overview 50
M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 1 29/11/16 2:43 PM
2/ News & Views December 2016 M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 2 29/11/16 2:43 PM
My 2017 investment to do list
What a year it has been. 2016 will go down as a year when the
impossible happened (twice), with the UK electing to leave the
European Union and reality TV star, Donald J Trump, being elected
President of the United States. Given the anticipated lift in volatility
for markets as the implications of these surprise outcomes unfold,
it is timely for clients to review portfolios and, if they haven’t already,
adopt some investment resolutions for the new year.
I will ... invest in installments Value of $1,000 invested in the Often, better returns can come from
and not try to time the New Zealand market over the past looking at areas that are out-of-
markets 25 years favour with the market.
Consistently trying to pick the
best time to buy and sell a share
$14,000
$12,101
I will ... focus on quality in
is inherently difficult and investors
$12,000 both my equity and fixed
run the risk of missing some of the
$10,000 income portfolio
$7,888
$8,000
best days if they constantly move $5,974
There is no need to consider sub-
$6,000
in and out of the market. This can standard investments simply
have a significantly adverse impact $4,000 because they enhance diversity.
on portfolio returns, as can be seen $2,000 Stick to quality for core holdings and
in the adjacent chart. Missing just 10 $-
Invested Missed 10 Missed 20
only buy investments that meet your
of the best days in the New Zealand throughout best days best days quality and income requirements –
market over the past 25 years would just aim to own as many of those as
Source: Bloomberg, Craigs Investment Partners. NZSE
have turned $1,000 into $7,888 Gross Index used in calculations. you can. Bond portfolios should be
versus $12,100 if you had remained anchored in a core holding of ‘vanilla’
invested throughout. If you had senior bonds. By ‘vanilla’ we mean
missed 20 of the best days, you I will ... look forward and not
bonds that have a very clear, simple
would have forgone 50% of your chase last year’s winners and transparent structure, in that
potential return, leaving you with Markets are forward looking and they are senior securities, with known
an end value of just $5,974. When it there is no guarantee that last interest payments and a definite
comes to investing for the long-term, year’s winners will repeat their maturity date. We would also expect
it makes sense to enter the market achievements. Changing economic most to have an investment grade
gradually. Avoid the risk of investing conditions, a change in a company’s credit rating. The resilience of quality
at a market peak by dividing your strategy or leadership, or a change companies in times of trouble should
capital into equal amounts and in the regulatory environment can not be underestimated. High quality
investing in installments over a have a profound impact. Investors companies tend to have more stable
period of time. need to understand the key drivers earnings growth over time and are
of a company’s performance and less susceptible to fluctuations in the
how these can be affected by a economic cycle.
change in the broader environment.
Portfolio strategy /3
M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 3 29/11/16 2:43 PM
I will ... invest for the long-term
I will ... not ignore quality fixed paid an appropriate return for the
income because interest higher level of risk assumed, then the
Although markets can be highly rates are low potentially lower return (but lower
volatile over the short-term, over Fixed income forms the bedrock of risk) investment is the better option
the long-term they have produced a portfolio. In times of volatility, as on a risk-adjusted basis. Minimising
strong results. With the benefit of we have seen in recent weeks, it is losses is far more important than
hindsight, there will always be some the high quality fixed income part of maximising gains. Not only is it
stocks you could have bought at a the portfolio that helps to provide important for your psychological
cheaper price and some you should stability in a portfolio, offsetting wellbeing, it will also improve
have bought more of. But if you are the volatility that can beset equities returns as any strategy that can
buying quality companies with good at times. While the yield currently dampen short-term losses will boost
long-term earnings prospects, then provided by high quality fixed long-term returns. Your portfolio
you will likely be better off in 10 years income securities is low relative to should be positioned to suit your
time than if you had persistently tried ‘the good old days’, investors should circumstances and tolerance for risk
to time your entry and exit into the be prepared to give up some return and it should never keep you awake
market. for a higher level of security. Even if at night.
the prospect of higher rates is just
... invest for income growth
I will ... review my investment
I will around the corner, this is likely to be
objectives and re-position
a drawn out process and maintaining
my portfolio if necessary
Income growth is a key element of a laddered portfolio of fixed income
share investing and portfolios should maturities to protect your income People have very different reasons
always generate an income stream. from changes in interest rates for investing. Some may be building
Build a portfolio of companies that remains paramount. up retirement savings or saving for
have sustainable dividends and a specific goal. Others may already
I will ... consider risk be in retirement and investing to
the potential to deliver a growing
income stream. If you do not require generate an income. For most
any additional income, then these Investors must take into people, the key objective of investing
dividends can be reinvested back consideration the level of risk is to generate an income stream,
into the portfolio for future growth. associated with any investment. either for today or for some time
Remember, if you are not getting in the future, while protecting the
future purchasing power of capital.
4/ News & Views December 2016
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Whatever the reason for investing, from your portfolio’s asset allocation. that you are willing to sell problem
we all need to set some objectives Any changes to your circumstances holdings and replace them with
and put in place a plan to achieve that have the potential to influence higher quality alternatives, and to
those goals. However, changing your asset allocation (for example take profits on stocks that have
individual circumstances, the a change to your investment rallied hard and now dominate
differing performance of various objectives or tolerance for risk etc), the portfolio. Also ensure your
markets, sectors within markets, or should be communicated to your portfolio is sufficiently diversified
holdings can tilt portfolios away from adviser. via issuer/company name, sector,
their intended purpose. Therefore, and geography. Most investment
We are now essentially in the eighth
periodic portfolio readjustments or disasters are caused by a lack of
year of an equity bull market and
the rebalancing of a portfolio should diversification.
many investors may not have
be undertaken to help ensure long-
experienced a broad based market
term investment goals remain on
I will ... maintain an exposure
correction and the impact this
track. to equity markets outside
can have on a portfolio’s value.
New Zealand
Contact your adviser to undertake
I will ... review my asset
an analysis of your current portfolio Global equities are a vital component
allocation
to determine if you are comfortable of any portfolio. They provide
Determining your asset allocation with your current asset allocation. diversification away from New
(exposure to the different asset Zealand, access to global economic
classes) is a very important step I will ... review the holdings in
growth, industries and companies
in portfolio management as it my portfolio not available here, and also the
determines, more than any other potential for higher levels of income
Establishing a portfolio by buying
factor, a portfolio’s risk and return growth than generally found on
a selection of investments to meet
profile. A significant amount of time our market. Don’t forget the New
your investment objectives and
is taken to determine the correct Zealand market comprises just 0.2%
asset allocation requirements is
allocation for you, therefore your of the total market capitalisation
not a set and forget process. A
portfolio’s asset allocation needs to of global equity markets and it is
holding’s fundamentals, its place
be continually monitored, rebalanced therefore prudent that clients have a
in the portfolio and the reason the
and reviewed to ensure you remain proportion of their portfolio invested
investment was purchased need to
comfortable with the level of outside our country.
be monitored and reviewed, at the
volatility that could potentially arise
very least annually. It is important
Portfolio strategy /5
M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 5 29/11/16 2:43 PM
Politics look set to dominate:
Key investment themes for 2017
Over recent years, central bankers have had markets hanging on
their every word, reacting to even the slightest change of tone.
We believe the effectiveness of central banks will be much more
limited from here, and that politics could displace central banks as
the key focus for many investors. With this is mind, we outline our
investment themes for 2017 below.
1 Politics likely to be an truly stunned when Donald Trump China Sea, the Middle East and
important driver for markets emphatically beat Hillary Clinton in Russia to keep investors anxious.
the US election, with the Republicans
Over the next few years, it might well We could see more regular bouts of
serving up a crushing victory over
be politics, as well as geopolitical risk volatility as markets fret over what
the Democrats.
generally, that takes centre stage could go wrong, and even if the
as a key macro driver for financial There is no shortage of important general trend is up, it is likely to be a
markets. political events on the 2017 calendar bumpier ride.
and we expect this trend of volatility
The last 12 months have been Action point: Make sure you are
to continue as they unfold. Markets
relatively volatile for markets. There well-diversified across asset classes,
have become well aware of the anti-
have been a couple of specific events geographies and sectors. Stick to
establishment, anti-globalisation
that have driven this – most notably high quality fixed interest and blue
undercurrent that seems to be
the Brexit decision in June and, more chip shares. Add some ‘portfolio
growing in many parts of the world.
recently, the US election. Brexit insurance’, such as gold (and then
In Europe alone, 2017 will see France,
caught markets by surprise and the hope it never performs).
Germany and the Netherlands go
high volatility immediately afterward
to the polls. There is also tension
reflected this. But if markets thought
involving hotspots like the South
that was a shock, they were well and
6/ News & Views December 2016
M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 6 29/11/16 2:43 PM
In China, manufacturing prices Action point for
recently rose for the first time in
almost five years. The producer investors
price index rose 0.1% in September Ensure portfolios have an exposure
(from a year earlier), the first to assets that can keep pace with
increase since January 2012. inflation. Stocks that should benefit
It has been a similar story in this in a higher inflation environment
part of the world, with September include:
inflation for both New Zealand Republic Services (US$54.91,
and Australia coming in slightly 2.3% gross yield) – Leading waste
ahead of market expectations. collection operator. Contractual
While it remains very low, pricing is tied to US inflationary
it certainly appears to have measures (such as CPI) that will
bottomed and could quietly rise protect the company’s cash flows
from here. from a return of inflation.
2 Inflation shows signs of life A catalyst for sharper than SPDR Gold ETF (US$116.77, 0.0%
Inflation, a traditional enemy of expected increases in prices gross yield) – Gold has a long and
investment and returns, has been would be tight labour markets in admirable track record of protecting
noticeably absent during recent places like New Zealand and the purchasing power in inflation
years. While we don’t envisage a US. Low unemployment tends adjusted terms, and performing
quick return to the high-inflation to add to wage pressures as well in environments where inflation
period of years past, 2017 could be employers must compete more exceeds market expectations.
the year we see it begin to make a fiercely for staff, and this usually
results in broader price rises. Amcor (A$13.83, 4.4% gross yield)
comeback. We have seen a few early
– Packaging giant Amcor services
signs of this just recently.
customers in the fast moving
The most notable element of the consumer goods sector who benefit
October jobs report in the US was from increased consumer spending
the better than expected increase as a result of higher inflation.
in wages. Average hourly earnings
Lend Lease (A$13.27, 5.0% gross
increased 0.4% for the month, lifting
yield) – A global developer,
the annual growth rate to 2.8%, the
construction firm and fund manager
strongest since 2009.
that will benefit from a pick-up in
global growth.
Fonterra (NZ$5.93, 6.8% gross
yield) – A higher milk price
challenges margins but improved
demand and higher prices will deliver
valuable operating leverage.
Trade Me (NZ$4.84, 5.3% gross
yield) – Online retail business with
substantial barriers to entry. Higher
inflation should drive higher fee
revenue in its auction business.
The above recommendations are class
advice only. We recommend you seek
advice from a qualified professional
before making an investment decision.
Portfolio strategy /7
M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 7 29/11/16 2:43 PM
3 Interest rates appear to have Having declined to a record low Action point for
passed their lows of 1.36% in August, the US 10-year
Treasury yield has increased to investors
Interest rates around the world spent
2.22%. Similarly, the New Zealand Own growth equities, maintain a
most of 2016 testing new record
five-year bond fell to 1.74% a few laddered portfolio to protect income,
lows. In New Zealand, mortgage
months ago and has since rallied and hold more cash and term deposits
rates have been the lowest in
more than 75 basis points to than usual to take advantage of any
decades, while the six-month term
2.50%. As markets have become opportunities. Stocks that should
deposit rate declined to 3.1% (the
slightly more optimistic about benefit from rising interest rates
lowest since 1965).
future inflation, rates have lifted include:
This has been a positive for from their lows, and some of the
borrowers, while fixed interest Berkshire Hathway (US$157.08,
strength in high yielding assets has
investors and prudent savers have 0.0% gross yield) – Berkshire’s giant
reversed.
been the losers. It has also meant insurance float will meaningfully
The world is still highly indebted, benefit from rising interest rates. In
that investors have flocked to
growth is fragile and there is a addition, Berkshire holds a wide range
anything with a yield as they look
plethora of risks that could derail of financial services companies, the
for alternative sources of income.
the current global economic biggest two being Wells Fargo and
This has had the effect of fuelling
trajectory. While our base case is American Express, which will also
house price rises, as well as boosting
for interest rate rises to be modest, benefit from rising interest rates.
share prices for high-dividend paying
it is quite plausible given major
companies. SPDR Regional Banking ETF
event risks that rates could revisit
However, we have seen the tide (US$50.42, 1.8% gross yield) –
lows or even go higher.
begin to turn with longer dated bond Passive, equal weight fund, which
We believe investors would be wise holds over 90 regional banks in the
yields moving higher over recent
to hedge their bets and position US. These companies will benefit from
weeks. While rates are highly unlikely
their portfolios to protect income. rising interest rates through an uplift
to return to historic levels anytime
soon, they appear to have passed to asset yields and margin expansion,
their lows and could drift higher over along with generally improving macro
the course of 2017. conditions.
iShares Global Technology ETF
(US$107.95, 1.1% gross yield) –
Holds over 100 of the largest tech
companies in the world but with
a clear bias to the US (c75% of its
holdings). The tech sector is one of the
few sectors with an attractive outlook
that also trades below its long-term
historical valuation metrics.
ANZ Bank (A$27.98, 5.2% gross
yield) – Major bank with an improving
return on equity profile as it redeploys
capital into its high margin Australian
business.
Computershare (A$11.52, 2.6% gross
yield) – Multi-national share registrar
with leverage to higher interest
rates via the returns earned on client
balances held in custody.
The above recommendations are class
advice only. We recommend you seek
advice from a qualified professional
before making an investment decision.
8/ News & Views December 2016
M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 8 29/11/16 2:43 PMThe IMF has noted the potential Action point for
for setbacks to their outlook is
high, something that is reflected
investors
in repeated markdowns in growth Own growth equities, both in New
during recent years. It is also Zealand and abroad. Selected
unclear how the US outlook will growth companies include:
change under Donald Trump. For
F&P Healthcare (NZ$9.19, 3.1%
now, markets are expecting many
gross yield) – Compelling long-
of his policies to be positive for
term growth opportunity in non-
economic growth, but it remains
invasive ventilation with technology
to be seen how these will be
advantage.
implemented and whether they will
deliver as expected. Mainfreight (NZ$19.00, 3.0% gross
yield) – Leveraged to the strong
The impact on other parts of
domestic economy, significant scope
the world is equally uncertain. A
to expand Australian margins, and
more protectionist stance could
4 017 could be a better year
2 gaining scale globally.
see improved US growth come
for growth shares at the expense of other parts of Brambles (A$11.66, 2.5% gross
The International Monetary Fund the world, most notably emerging yield) – 45% of this logistics
(IMF) is forecasting global economic markets. Ironically, this could drag company’s revenues are derived
growth to slow to 3.1% in 2016, before global growth down and, to a from North America, providing a
recovering to 3.4% next year. The degree, impact the US as well. defensive exposure to increased US
recovery is projected to pick-up as consumer spending.
On balance, and despite these
the outlook improves for emerging risks, it could well be a reasonable James Hardie (A$19.51, 3.2%
markets, and the US economy year for growth companies. The gross yield) – Building products
regains some momentum. In the US, yield on longer-dated bonds manufacturer that derives 80% of its
a recovery in investment is projected, are well off their lows, and this revenues from the US. Will benefit
as is a fading drag from inventories. could make for a challenging from an improving US housing cycle.
IMF forecasts suggest US growth will environment for high-yield
pick-up from 1.6% this year to 2.2% in Amazon (US$746.49, 0.0% gross
companies. While they offer
2017, while emerging market growth yield) – Amazon is one of the highest
attractive dividends, investors will
will rise from 4.2% to 4.6%. quality companies within the internet
be less willing to pay high prices
sector given its consistent innovation
On the other side of the coin, Europe, for these as alternatives (such as
and execution, and the size of the
Japan and the UK are expected fixed interest and bank deposits)
opportunities it is targeting. Amazon
to see growth slip. None of these are now offering more reasonable
controls dominant positions in two
regions are expected to see negative returns.
very important and fast growing
growth, but momentum is forecast If growth, inflation and interest markets; e-commerce and cloud
to slow. rates are going to be higher than infrastructure.
Here in New Zealand, the RBNZ is we have seen in recent years,
Kirby Corp (US$64.80, 0.0% gross
forecasting GDP growth of 3.7% companies with lower yields but
yield) – Kirby transports bulk liquid
in the year to March 2017, and more attractive growth prospects
commodities in tank barges using
3.6% in the 12 months after that. will be the beneficiaries. We
the Mississippi river and the coastal
Even if these growth forecasts are recommend investors ensure they
waters of the Gulf of Mexico. Kirby
negatively impacted by the recent have a healthy allocation to high
will be a key beneficiary of the
earthquakes, we still expect the New quality companies with strong
increased role the US is expected
Zealand economy to deliver robust growth options.
to play in global energy, refined
growth. products and petrochemicals.
The above recommendations are class
advice only. We recommend you seek
advice from a qualified professional
before making an investment decision.
Portfolio strategy /9
M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 9 29/11/16 2:43 PM5 New Zealand is in great New Zealand GDP growth (seasonally adjusted)
economic shape, but don’t
KEY: GDP GDP per capita
get complacent
The domestic economy has been 5.0%
firing on all cylinders in 2016.
4.0%
Economic growth was 3.6% in the
year to June, the strongest since
2014 and the envy of the developed 3.0%
world. Migration is still hitting record
highs, unemployment has fallen 2.0%
below 5% for the first time since
2008, and business confidence 1.0%
remains robust.
0.0%
Dairy prices have risen more than Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16
50% since July and are at their
-1.0%
highest levels since June 2014.
Fonterra last month lifted the payout Source: Statistics New Zealand, Craigs Investment Partners.
to $6.00 (before dividends), which
is significantly higher than last year’s
$3.90. This means the average
farmer will be above breakeven for
Fonterra payout (including dividends) and breakeven point
the first time in three years.
KEY: Breakeven
It is encouraging that the economy
has grown at its fastest pace in more $9
than two years while a key export $8
sector like dairy has been in an
$7
unprofitable position. This bodes well
$6
for 2017.
$5
However, we shouldn’t get
$4
complacent. It is possible that things
$3
are close to ‘as good as they get’
for the local economy. The very $2
strong house price gains over the $1
last few years will have certainly had $0
a positive impact on many sectors,
9
0
1
2
3
4
5
6
7
8
9
10
20 1
20 2
20 3
20 4
20 5
20 16
7f
/0
/1
0
0
/1
0
0
/1
/1
0
/9
0
0
0
/1
/0
/1
/
9/
10
1/
6/
2/
4/
7/
5/
8/
3/
11
12
14
15
13
0
98
16
99
0
0
0
20
as well as consumer spending and
0
0
0
0
0
0
0
20
20
20
19
20
20
20
20
20
20
20
19
activity levels. Further, house price
Source: Dairy NZ, Fonterra, RBNZ, Craigs Investment Partners.
gains in the region of 10%+ pa are
unsustainable, so from here we might
need to see genuine productivity
growth, which is much harder to
come by.
We also need to remain cognisant
that we are a small, vulnerable
economy that is still highly
dependent on our primary sector.
As such, investors must ensure they
10 / News & Views December 2016
M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 10 29/11/16 2:43 PMAction point for
investors
Ensure you are diversified outside
New Zealand and Australia. Use the
strong currency to add to global
equities. Some of our favourite global
names at present include:
Alphabet (US$779.98, 0.0% gross
yield) – Holds leading positions in
most of the internet’s key segments,
positioning it favourably to benefit
as marketing spending follows
are well-diversified across other therefore remain above long-term
consumers from traditional mediums
markets, if only as an insurance averages over the coming year,
into digital.
policy against ‘New Zealand risk’. particularly against those with a
more challenging outlook such as Bunzl (£20.01, 2.2% gross yield) –
The recent earthquakes are a stark
the UK, Japan, Europe, and even This leading distributor of a range of
reminder of this. The impact on
Australia. products, including outsourced food
growth from these events is difficult
packaging and disposable supplies
to predict, but activity will certainly We are more optimistic regarding
to supermarkets, offers investors a
be dented, with transport links the US dollar and are happy to
rare combination of stable cash flow
suffering disruption and the tourism recommend increased weightings
generation and a high return growth
industry taking a minor hit. to the greenback. The US is the
opportunity.
only country in the world talking
While the construction sector will
about rate hikes, which illustrates Johnson & Johnson (US$116.36,
get a boost from the rebuild work
the stronger position they are in 2.8% gross yield) – Attractive
and further strengthening work,
relative to many others. valuation, strong cash flow
this could be limited by capacity
generation and broad exposure to
constraints in an already busy sector. We expect the US economy to
the healthcare sector makes Johnson
Government finances are more than continue steadily improving, which
& Johnson one of our preferred
capable of taking care of the rebuild should see the New Zealand dollar
direct equities within our coverage
costs, although slightly higher decline further against the US
universe.
debt levels are likely, and expected dollar over time. In addition, we
surpluses are now at risk. are attracted to the US dollar as a SPDR S&P 500 ETF (US$217.87,
hedge against volatility, given it is 2.0% gross yield) – SPY provides
On balance, the economic impacts
one of the first places investors go exposure to the largest 500 listed
of the earthquake will be modest
during times of stress. companies in the US, with heavy
and short-term on an aggregate
weightings in sectors where
basis. This is unlikely to have a There are many excellent
American industry is pre-eminent
material impact on the country’s companies and industries that we
worldwide such as software, medical
positive economic story. cannot adequately access on the
and aerospace products.
New Zealand market. These include
In terms of the currency, it is
technology, financials, energy Visa (US$80.08, 0.8% gross yield)
difficult to see the New Zealand
and other high growth sectors. – As the world’s largest electronics
dollar falling too far while we are in
Investors unwilling to consider payments provider, Visa is a key
generally better shape than many
companies listed overseas risk beneficiary of the shift from cash to
peers – currencies reflect a number
missing out on some exceptionally paperless transactions and mobile
of factors, and economic growth
high quality long-term investments. payment innovations.
is one of them. The currency could
The above recommendations are class
advice only. We recommend you seek
advice from a qualified professional
before making an investment decision.
Portfolio strategy / 11
M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 11 29/11/16 2:43 PMis the heavy dominance of mining Action point for
companies (as well as banks, which
have been under pressure for investors
different reasons). Selectively add quality holdings in
Since February, commodities have the oil and commodities sectors.
made somewhat of a comeback. Two commodity plays we like at the
Similar to what we have seen present include:
with dairy prices, the oil price has Suncor (US$30.51, 3.8% gross yield)
rebounded into a trading range of – Low operating costs, minimal
approximately US$40-50, while future investment requirements,
other commodities have also and a sustainable capital structure/
been strong in recent months. dividend make Suncor a more
Iron ore, Australia’s biggest export defensive energy exposure than the
commodity, is currently back at company’s over-indebted and higher
levels not seen since April. cost traditional exploration and
We believe the worst is likely over production peers. Suncor’s growing
6 he worst is over for
T for oil and commodity prices. production profile, the company’s
commodities, but don’t rush However, we also expect any well timed acquisition of Canadian
in just yet recovery to be volatile, punctuated Oil Sands and substantial reserves,
by sharp rallies that eventually which become economical at higher
Oil and commodities have been
fade, before the cycle repeats. prices, also means Suncor retains
a minefield for investors over the
significant upside should oil prices
last few years. The oil price sat
Investors could potentially do rise.
comfortably around US$100 from
well in commodities on a three
2011 through to early 2014, before FMC Corp (US$53.50, 1.3% gross
to five year view, although over
collapsing and ultimately going as yield) – FMC operates three very
short-term timeframes (such as
low as US$27 in February of this attractive businesses; agricultural
the next 12-18 months) it is likely
year. There were numerous reasons chemicals, heath and nutritional
to be a volatile ride. Despite this,
for this including oversupply, weaker ingredients, and lithium. Each
we still see opportunities in the
demand from some regions, as well business has impressive returns on
energy sector, although we believe
as other factors unique to specific invested capital and a compelling
investors need to be very selective.
commodities. long-run growth thematic. A
recovery in the company’s core
This volatility has flowed through to
agricultural chemicals end market
mining and resources companies,
is still in its early days and FMC’s
as well as those servicing the
valuation remains undemanding.
industry. A key reason for the
underperformance of the UK and
Australian markets in recent years
The above recommendations are class
advice only. We recommend you seek
advice from a qualified professional
before making an investment decision.
12 / News & Views December 2016
M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 12 29/11/16 2:43 PMPortfolio strategy / 13 M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 13 29/11/16 2:43 PM
Investor implications of a
Trump Presidency
Against most predictions, Donald Trump managed to win the US
election in November, despite the majority of popular votes going
to Hillary Clinton. Below we discuss the possible implications for
markets following this historic win.
There are numerous views on anti-establishment, anti-globalisation It is also an important tourist
how and why he won, but general undercurrent that is growing in many market for us, with 8.3% of total
consensus is that winning the ‘rust parts of the world. The Brexit vote visitor spending coming from US
belt’ states of Wisconsin, Michigan, and the Trump win both reflect this. visitors. Approximately 3.5% of our
Ohio and Pennsylvania got him over permanent migrants also come from
the line. Obama won these states in What does this mean for the the US, a number that might rise a
2012, but this time they responded to New Zealand economy? little now.
Trump’s pledge of bringing the jobs
This result is potentially a negative The Trans Pacific Partnership
back to the US.
one for the New Zealand economy. Agreement, which would improve
These regions all include former As a small country dependent on export opportunities for many into
manufacturing hubs, where trade, the anti-globalisation rhetoric the US, now looks to be a long-shot
factories have closed and jobs have from the Trump campaign does under Trump. There was little in that
disappeared as operations have not bode well for our long-term for the dairy sector anyway, but
moved offshore. Trump promised prospects. other industries will be disappointed.
to return jobs to these states, while
While we are not in the immediate It is still unclear how much of the
the Clinton campaign arguably took
firing line for any new tariffs (that strong Trump rhetoric we heard on
them for granted and didn’t work
prize goes to China and Mexico), the campaign trail will ultimately
hard enough to keep hold of them.
the US is still an important trading translate into policy. We have already
A vote for Trump can be better partner. It is our third largest export witnessed a much softer stance from
described as a vote against the market (behind China and Australia), Trump, which is a key reason markets
status quo. It now seems that taking 11.7% of our total goods and rallied to record highs in the days
many forecasters, economists services. Our key exports to the US following the election.
and politicians have been are meat, dairy products and wine.
underestimating the strength of the
14 / News & Views December 2016
M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 14 29/11/16 2:43 PMDoes anyone win under Five key implications of Higher US interest rates. Donald
Trump? Trump is not a big fan of the Federal
a Trump presidency Reserve Chair, Janet Yellen, or her
Yes. Many of his policies are
US companies will benefit at the deputy, Stanley Fischer. He thinks the
strongly positive for US economic
expense of multinationals. A key Fed is acting somewhat irresponsibly
growth, even if some of them
aspect of the Trump agenda is (and politically) by keeping interest
could come at the expense of
protectionism, which is the opposite rates as low as they are. Yellen and
some other parts of the world.
of globalisation and free trade. He Fischer might not be reappointed
Domestically focussed US
wants to bring manufacturing back under Donald Trump, and any new
companies could do very well
to the US, impose hefty tariffs on officials could be inclined to increase
under Trump, most notably the
Chinese and Mexican imports, and rates at a faster pace. Buy SPDR S&P
financials, energy and healthcare
become much more insulated from Regional Banks ETF, Wells Fargo,
sectors. These sectors were all up
the rest of the world. US companies Berkshire Hathaway.
strongly in the period immediately
with mainly domestic customers will
following the election. Growth in America could actually
benefit from that, but multinationals
improve. Trump wants to cut taxes
Pro-growth policies, tax reform, doing business across borders
and increase spending on defence
increased infrastructure spending, won’t. Buy SPDR S&P MidCap ETF,
and infrastructure. This fiscal stimulus
higher interest rates and a Berkshire Hathaway, Wells Fargo.
would likely increase US economic
strong US dollar also offer clear
We could see inflation start to growth, in the short-term at least.
opportunities for investors.
increase. Globalisation has been a The growth could come at the expense
key driver of deflationary pressure of other parts of the world, such as
What should investors do?
in recent decades, as low cost the emerging markets. Buy Berkshire
There is no need to panic. The US producers and extra capacity in Hathaway, Suncor, Kirby, CVS Health,
political system is much more than places like China have pushed prices SPDR S&P MidCap ETF, Visa.
one person. We are generally very lower. If Trump gets the ball rolling
A stronger US dollar. The combination
comfortable with our positioning for the rest of the anti-globalisation
of higher interest rates, as well as
and our strategy. Our economy is movement, we could see some of
stronger economic growth, would
in exceptionally good shape, which those trends reverse. A surprise
likely see the US dollar rally against
bodes well if we are going into a inflationary spike would swing the
most other currencies, including
more volatile period. balance further away from high-yield
ours. As a result, we should see some
investments toward those with a
benefits from a stronger US economy
growth tilt, as well as putting upward
and a rising US dollar. We’re not likely
pressure on interest rates. Buy SPDR
to be in the firing line for Trump’s anti-
Gold ETF, VanEck Vectors Gold
trade policies as much as others, but
Miners ETF, Republic Services,
we might need to give up on the Trans
Suncor, Kirby.
Pacific Partnership trade deal getting
approved. Buy Bunzl, Shire, Roche.
The above recommendations are class advice only. We recommend you seek advice
from a qualified professional before making an investment decision.
Portfolio strategy / 15
M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 15 29/11/16 2:43 PMShould investors be worried about
the outlook for local shares?
The local market has suffered a short and severe sell-off during the
past few months. Since the NZX 50 peaked in early September it
has fallen 9.9%, a larger decline than we have seen from other key
global markets.
Why have New Zealand shares Performance of key markets from Secondly, markets globally have
seen sharper falls? third quarter peak (local currency got a sense that interest rates may
terms) be close to a bottom, and that we
In our view, there are three key
might even be seeing some early
reasons for the weakness in 6% signs of inflation. While it is likely that
local shares. One is clearly the
3% inflation and interest rates will remain
exceptionally strong performance in
0% well below long-term averages for
recent years. The NZX50 rallied 36%
some time, financial markets may
in the 12 months leading up to the -3%
have moved too far in favour of them
peak in early September. This is well -6%
remaining at rock bottom forever.
above the return of the US (+13.5%)
-9%
or Australian (+12.8%) markets over As this theme gathers steam,
-12%
the same period. After such a strong investors around the world have
an
nd
ia
e
K
S
op
U
U
p
al
la
Ja
increase, a correction seems quite been reducing their exposure
tr
ur
ea
us
E
Z
A
to interest-rate sensitive shares
ew
understandable, and is probably
N
healthy. The NZX50 is only back at (property, utilities, telecoms and
Source: Bloomberg, Craigs Investment Partners.
levels last seen in June. infrastructure) and adding to
companies that provide more
growth (technology, financials and
16 / News & Views December 2016
M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 16 29/11/16 2:43 PMLonger-term interest rates S&P 500 sector moves since 30 June 2016
KEY: NZ 5-year swap rate NZ 2-year swap
rate US 10-year bond yield 25%
20%
5.0%
15%
10%
4.0%
5%
3.0% 0%
-5%
2.0% -10%
-15%
1.0% -20%
es
ls
2011 2012 2013 2014 2015 2016
0
es
s
ls
e
y
gy
ls
sc
e
ia
m
0
at
rg
iti
ia
ia
r
l
di
P5
ca
ap
r
lo
co
st
nc
til
er
e
st
no
En
s
lth
lE
S&
st
U
du
le
at
na
on
Te
ch
M
ea
ea
s
Source: Bloomberg, Craigs Investment Partners.
In
Fi
C
on
Te
R
H
C
Source: Capital IQ, Craigs Investment Partners.
Five year forward US inflation rate some industrials). This can be seen more defensive sectors that have
expectations in the above chart which illustrates been sold off globally, with a
the performance of the different much more limited exposure to
3.5%
sectors of the US market since the growth sectors. The five weakest
middle of the year. Although the sectors since the middle of the
3.0%
S&P 500 has been relatively flat year (telecoms, utilities, consumer
2.5% overall, there have been some strong staples, real estate and healthcare)
divergences between sectors. The represent 55% of the NZX 50 index,
2.0%
sectors on the right of the chart have a very heavy weighting compared
been great performers as interest to overseas markets. Conversely, we
1.5%
rates have declined, but have been only have a 6.7% weighting to the
1.0% much weaker lately as rates have two best-performing sectors in the
Oct-11 Apr-13 Oct-14 Apr-16
rebounded. Conversely, sectors with US. In short, the sectors that have
Source: St Louis Federal Reserve, Craigs Investment better growth prospects and less caused our market to perform better
Partners. interest rate sensitivity have been than just about every other global
stronger performers. market over the last few years have
recently become a weakness, as
The New Zealand market is heavily
the declining interest rate trend has
skewed toward the higher-yield,
reversed.
Portfolio strategy / 17
M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 17 29/11/16 2:43 PMFinally, it also appears that The vast majority of our NZX-listed Stocks we view as
international investors have been companies are in a strong financial
much less active in the local position, and are growing their attractively valued
market during recent months. Our profits and dividends solidly (the Trade Me (NZ$4.84, 5.3% gross
excellent yields have attracted a median earnings growth forecast yield) – Online retail business with
lot of offshore money over the for the coming year is a healthy substantial barriers to entry. Trade
last few years, particularly into the 8.9% at present). Me’s strong operating cash flows
larger companies that have high underpin a high return on equity and
Despite some concerns over house
liquidity. Just as this additional fund a reliable, growing dividend.
prices and household debt, the
buying interest boosted share
short-term economic outlook for Contact Energy (NZ$4.47, 8.0%
prices to higher levels early in the
New Zealand is very strong, with gross yield) – Contact offers the
year, its reversal has accentuated
the biggest challenges for this year most value in the New Zealand
the weakness over the latter part of
being high valuations and a lack electricity sector and is making
the year.
of opportunities. In this regard, a progress operationally after several
correction of 10-15% is healthy, as years of poor performance.
Should investors be worried
it brings the market back toward a
about the outlook for local reasonable buying zone again.
Ryman Healthcare (NZ$8.57, 2.2%
shares? gross yield), Summerset (NZ$4.88,
Despite our relatively upbeat 2.1% gross yield) – Both continue to
Over the short-term, our market
view on the economy, recent experience strong customer demand
could remain volatile and could
events are a timely reminder that for services, while house prices
weaken a little further. It has had
international diversification is vital remain supportive.
an outstanding few years that have
for all investors. The impact of the
pushed it into relatively expensive Meridian Energy (NZ$2.49, 9.1%
US election on different sectors of
territory, and it could take a little gross yield) – We like Meridian for its
the market, as well as the recent
time for this to unwind, or for the high quality assets, strong earnings
earthquakes, have highlighted the
impact of changing international growth profile, and a steady dividend
vulnerability of a small country like
investor preferences to conclude. that will likely be supplemented by
New Zealand to factors outside of
capital management in the coming
On a longer-term basis, there is less our control.
years.
cause for concern. Shares reflect
Well-diversified investors with
the future outlook for an economy,
healthy exposures to high quality
although they can certainly over
global assets will have come
and undershoot for periods of
through the last few months
time. Ultimately, the fortunes of
relatively unscathed. Holding these
companies listed on the NZX will
assets in other currencies (like the
largely be driven by the economic
US dollar) provides an important
prosperity of New Zealand as a
insurance policy against ‘New
whole.
Zealand risk’. The above recommendations are class
advice only. We recommend you seek
advice from a qualified professional
before making an investment decision.
18 / News & Views December 2016
M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 18 29/11/16 2:43 PMPortfolio strategy / 19 M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 19 29/11/16 2:43 PM
Fixed income: Trump election will
see higher global interest rates
The shock election of Donald Trump as the next president of the US
had immediate implications for bond markets across the globe. As we
go to press, the yield on longer-dated New Zealand bonds has spiked
0.34%, on the back of a 0.43% lift in 10 year US Treasuries. Looking
ahead, we expect the direction of longer-dated rates to be driven by
movements in the US.
There has never been a US The yield on 10-year US Treasuries We have discussed in prior
president with so little experience has spiked since the elections publications how central banks
in government and it would be imposing monetary policy have ruled
fair to say that Trump, during his 2.4% the world over the last few years, and
electioneering process, has come 2.2%
that it was time this responsibility
up with some extremely contentious was shared by governments using
2.0%
and controversial policy proposals. fiscal policy. This day has likely
His inauguration is not until January, 1.8% come in the US, with Trump’s
and it will take months before his election promises including large
1.6%
new team is appointed and we have fiscal stimulus, ambitious tax cuts,
more insight into what polices will be 1.4% reduced regulation and increased
enacted. In the meantime, markets 1.2% protectionism. Each one of these is
will be trading on every small piece Jan-16 Apr-16 Jul-16 Oct-16 bearish for rates and the outcome
of news and we expect there will be Source: Bloomberg, Craigs Investment Partners.
is likely to be much higher levels of
continued volatility across financial public debt.
assets.
There is the possibility that his more
Focussing on the impact on the above shows the 10-year US Treasury radical policies will be constrained
bond market, the immediate effect bond is now up over 0.40% since the by Congress, especially if they lead
has been an abrupt shift upwards election outcome was announced, to a larger deficit than approved. He
in US Treasury yields, followed by taking it almost back to January 2016 cannot unilaterally introduce major
sovereign bonds globally. The chart levels. changes without Congressional
20 / News & Views December 2016
M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 20 29/11/16 2:43 PMTrump’s proposals would result in this magnitude and will want interest
a material increase in public debt rates to stay low. As well, there are
unless growth increases headwinds from an increasing oil
KEY: Public debt as % of GDP (Trump proposals) price and political uncertainty with
Public debt as % of GDP (current law) upcoming European elections to It is likely we have seen the lows in
contend with. While yields in these this interest rate cycle
110%
countries will reflect the upwards KEY: New Zealand 7yr swap Trend line
100% trend, the moves are likely to be
smaller. 5.5%
90% 5.0%
80%
Where to from here for interest 4.5%
rates? 4.0%
70% 3.5%
The US election outcome has
3.0%
60%
perhaps been the catalyst for rates
2.5%
2010 2013 2016 2019 2022 2025 to bounce higher and we see scope
2.0%
for US rates to rise even further into
Source: Committee for a Responsible Federal Budget, 1.5%
CBO, Haver Analytics, Craigs Investment Partners. the end of the year and next. This Nov-10 Mar-12 Jul-13 Nov-14 Mar-16
will result in a steeper yield curve in
Source: Bloomberg, Craigs Investment Partners.
anticipation of the fiscal stimulus,
support. In addition, when a country which realistically will be mid-2017
already has a lot of debt, as the onwards, lifting growth and inflation
We believe we have seen the lows
US does, then it is important that prospects. New Zealand interest
in this interest rate cycle. However,
the central bank is also onside and rates trade at a spread above US
we are mindful of many areas of
continues to buy bonds so interest Treasuries, reflecting the higher
concern and despite the initial sharp
costs can be contained. Trump has risk of our small open economy.
move upwards, globally there is more
been highly critical of the Federal The interest rate moves are well
uncertainty and potentially lower
Reserve and its Chair, Janet Yellen, correlated (as can be seen in the
growth, which will suppress interest
which suggests this could be chart below), although the New
rates. Our base case is for rates to
challenging. However, for what it is Zealand rates tend to over-extend
range trade gradually higher, bearing
worth, he is also on record as saying both ways in times of stress.
in mind that we have yet to get back
“I’ve always been a low interest rates
to where interest rates were even
person. Now if inflation starts coming
at the start of this year. The short-
in… that’s a different story… but right Longer-term interest rates in end is likely to be anchored at 1.75%
now I am for low interest rates and I New Zealand are driven by 10 year
for 2017, albeit with a higher risk of
think we keep them low”. The market US Treasuries
downside now post the earthquake
will be looking for policy continuity
KEY: New Zealand 7yr swap US 10yr Treasury of 14 November. Given the big rise
and confirmation Chair Yellen will
we have already seen since the end
not resign. At this stage her term 10.0%
of the third quarter, we see limited
extends to 2018. Keeping rates low
8.0% capacity for yields to move up much
in the US will help prevent the dollar
more before retracting. Over the
from strengthening too much as 6.0% next few months, we see 3.5% as the
fiscal spending increases and this
next ceiling, which is where we were
might see rate hike expectations 4.0%
at the beginning of 2016. While we
suppressed.
2.0% do not claim to be technical traders,
The election of Trump also needs we will be watching to see if interest
to be seen in the context of the rest 0.0% rates stay within the two trend lines
Nov-00 Nov-05 Nov-10 Nov-15
of the world. Europe and Japan are as shown on the chart above.
unlikely to move to fiscal stimulus of Source: Bloomberg, Craigs Investment Partners.
Portfolio strategy / 21
M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 21 29/11/16 2:43 PMNew Zealand investors have in bonds, one strategy for investors and see rates back at their lows.
seen capital prices increase in this environment is to reduce By continuing to invest in laddered
but yields fall – now a partial the amount they invest in the maturities, income is protected.
reversal longer dated bonds to position the
portfolio more for rising yields (i.e. Duration – what is its relevance
Investors in income assets have targeting a lower duration). In our to the investor?
seen interest rates fall to historical Investment Policy Guidelines for
lows this year, with six month term The duration of a bond portfolio is
building Fixed Income Portfolios we
deposits returning as little as 3.1% a measure of exposure to changes
have included the table below. This
(last seen in 1965), and long dated in interest rates. It is the weighted
shows weightings in various maturity
corporate bonds have traded with average of the time until the fixed
buckets can change according to
yields in the ‘3’s. In essence, savers cash flows are received and is
interest rate views. For instance, if
have been the losers in recent years usually measured in years. Due to
rates are expected to rise then an
compared to borrowers. the forecast receipt of the fixed
investor might choose to have more
coupons over the life of a bond, the
Most clients have exposure to short-term investments and have
duration measure is shorter than
domestic bank term deposits and bonds with maturities of over five
the maturity date. The duration of
corporate bonds within their fixed years totalling closer to 10% rather
many portfolios has shortened over
interest portfolios. These tend to be than 40%.
the last two years as investors in
laddered with maturities extending
general have opted not to reinvest
out to around seven years. One Reinvestment risk mitigated
all of the funds from maturities back
of the three key risks of bonds via investing in securities with
into bonds (the average duration
is ‘reinvestment risk’. This is the laddered maturities across client portfolios now 2.5
risk that coupon payments and
While we have already said our to 3 years). We would call this a
principal repaid have to be invested
expectation is for interest rates to short duration portfolio, which in
at a lower interest rate than the
move higher, we do not see it as a effect means portfolios are already
current investment. At this point in
one way street to pre global financial positioned for a rise in yields. In
the cycle with headlines signalling
crisis levels. It is more likely we see offshore markets, investors tend to
higher interest rates, investors may
range trading with yields up 0.5% have more exposure to longer dated
be concerned they should not be
to 1.0% during the next two years. bonds, including ultra-long (out
reinvesting in longer-term bonds
The short end we continue to see to 50 to 70 years), in the clamour
at all and should put spare funds
anchored at 1.75% until at least for yield. While our rates reached
into short-term deposits. While we
2018. There is also a ‘foreseeable’ record lows, domestic investors
continue to like term deposits up
possibility that one of the plethora have been fortunate in that they did
to one year at yields of c3.6%, we
of risks eventuates, which could still manage to achieve positive real
caution against having too much in
derail the interest rate trajectory after-tax returns.
short dated assets. This is also a risk
to income.
Over the last few years we have been
buyers of bonds (despite interest Recommended maturity profile of a bond portfolio
rates falling from 8% to 4%) on the Maturity date (or interest rate reset date) Minimum Maximum
basis that it provided certainty of Up to including 1 year 10% 40%
income and expectations were
Above 1 year and up to 3 years 20% 40%
for lower interest rates for longer.
Above 3 years and up to 5 years 20% 40%
However, post the recent spate of
new issues all at or around 4.0%, Above 5 years and up to 7 years 10% 30%
investors began to signal a reduced Above 7 years 0% 10%
appetite for the longer dated bonds.
Source: Craigs Investment Partners.
At the same time, rates began to
increase. Rather than stop investing
22 / News & Views December 2016
M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 22 29/11/16 2:43 PMInterest rate movements have more significant implications for longer-dated bonds
Price of Price of bond Percent change Price of bond Percent change
Issue bond at par if yield rose 0.5% relative to par if yield rose 1.0% relative to par
2 year bond, 4% coupon, 2.0 year duration $100.00 $99.05 -1.0% $98.12 -1.9%
7 year bond, 4% coupon, 6.1 year duration $100.00 $97.10 -2.9% $94.28 -5.7%
US Treasury, 2% coupon, 9.1 year duration $100.00 $95.50 -4.5% $91.30 -8.7%
Source: Craigs Investment Partners.
Implications of a short duration longer and the coupon lower. One term deposits at c3.6% (low risk,
portfolio can only imagine the pain of holders positive real return significantly
with low coupon 30-year and ultra- above the cash rate), and would not
The impact on the price of a bond
long bonds when yields rise. be afraid to invest in some corporate
from rising interest rates is much less
bonds. Portfolio duration is already
significant for shorter dated bonds, Many investors will also have term
short and the road for interest rates
or a portfolio of bonds with a shorter deposits in their fixed income
is far from a one-way street at this
duration. This can be seen in the portfolios. These cushion further
time. Depending on your portfolio,
above table where we look at the the impact of any change in yields
take advantage of the shift in higher
impact on the price of some short as they are valued at par. We would
yields and lock in income. Securities
and longer-dated bonds when the also add that for investors who
we like include investment grade
yield moves up by 0.50% and 1.0%. hold bonds to maturity this change
corporate bonds at well over 4%.
in valuation of a bond due to a
It is clear to see that the impact For example Chorus 2021 bonds at
general shift in interest rates is of
on the price of the shorter dated 4.20% (Core), Contact Energy 2021
lesser concern. While they will see
bond is substantially below that of bonds at 4.15% (Core) and non-
the movement in their portfolio
a longer-dated bond. This logic can rated bonds such as those issued by
valuations, the reality is that on
be applied to a portfolio of bonds. Kiwi Property maturing in 2023 at
maturity they will receive the full
For example, a laddered portfolio 4.60% (Supplementary) and The
capital value back.
of bonds with a three year duration Warehouse maturing in 2020 at
would see its value decline 2.8% if 4.25% (Supplementary). Although
What should investors be
interest rates moved up 1%. Compare less liquid, to enhance yield consider
doing?
this to a US portfolio where a typical Genesis Energy subordinated bonds
duration might be nine years (so Towards the end of the quarter we with a call in 2018 at an estimated
three to four times longer than our will see some funds returned to the yield of 5.60% (Niche).
client portfolios). The fall in valuation market from maturities of several
is much more pronounced (-8.7%) corporate bonds. We would be
because the duration is so much taking advantage of the AA- bank The above recommendations are class
advice only. We recommend you seek
advice from a qualified professional
before making an investment decision.
Portfolio strategy / 23
M105816-CIP-Koru Club-N&Vs Abridged-Dec16-FA.indd 23 29/11/16 2:43 PMYou can also read
