First mayhem, now volatile growth

BY TIM HUNTER

Where to invest in 2010? After the mayhem of the past couple of years it's a tough question and many investors will remain gun shy, wary of exposing themselves to further losses.

However, taking some risk right now could be the safest thing to do.

Cash, the saviour of many a portfolio during the meltdown, is now "an incredibly unattractive place to be", said Alan McChesney, principal of NZ Assets Management. "Now that the armageddon exposure has passed, the returns [from cash] are so unattractive there's an opportunity to take a little more risk to get more return."

But before everyone unstuffs their mattresses it's worth reflecting that NZ Assets still has about 30% cash in its portfolios. McChesney is not expecting a rampaging bull market by any stretch.

What he and others are expecting is patchy, volatile growth.

"The difference between now and 12 months ago is everyone is thinking about how to make money from the economy growing," said Sam Stubbs, head of investment at Tower.

Not that it would be straightforward.

"We think it's going to be a year of two halves," he said. "In the first half the world is still benefiting from low interest rates, so we'll be long equities. In the second half the world will get used to it. And then you want to be short equities and long cash."

Stubbs's view on the importance of interest rates is a common one among investment professionals. The scenario is this – the world's central banks are running very low interest rates to boost economies out of the global crisis and are likely to keep doing so for much of the year.

How low are those rates?

America has 0.25%, Britain 0.5%, Europe 1%, Japan 0.1%.

At fund manager ING, investment strategist Stuart Millar is cautiously optimistic and one of the reasons is "we believe central banks will be slow to remove their accommodative policy [low interest rates].

"There is plenty of capacity so we don't believe there are imminent inflation concerns. That means cash rates are going to remain low, so there's no point holding cash. So we have a bias towards riskier assets."

By riskier assets, Millar means shares in local and overseas companies. But which ones?

In the big picture, one of the areas investors seem to agree on is the continuing potential of Asia in general and China in particular.

"To a large extent it's because interest rates globally are effectively set by the dominant economies," said McChesney.

"And because of the crisis they've been through, they are going to keep rates low for a long time, so regions like Asia have artificially low interest rates and that feeds into an incredibly stimulatory environment."

Over at First NZ Capital, the view is similar, if the language is more wary.

"We are still reasonably favourably disposed to emerging markets such as China," said research analyst John Norling.

"We've had some strong runs but there is still significant growth potential. When you're talking forecasts of a bit over 9% GDP growth for 2010 – that's pretty impressive."

Goldman Sachs strategist Bernard Doyle favours emerging markets generally. "They've gone through a fairly testing time," he said. "And their financial systems have held together better than in the advanced economies. That says to us you'll probably see a cleaner recovery there."

Highlighting opportunity in China is all very well, but how do private investors access it?

The answer is through collective investment vehicles such as managed funds – but there are precious few New Zealand funds targeting China in particular or Asia in general, none of them listed on the NZX. Examples of unlisted funds include ASB's Emerging Markets Share Trust and AMP's Asian Shares, although good investment advisers should be able to offer at least one fund accessing Asian shares. For listed funds, investors must look to Australia, where several are available on the ASX.

Asia is not the only growth story though. McChesney likes America, as do Millar and Stubbs, arguing the low US dollar and huge stimulation from the Federal Reserve and the government could fuel a `V-shaped' recovery. New Zealand companies exposed to US recovery, such as Fletcher Building and Fisher & Paykel Healthcare, could benefit.

For Stubbs, however, there is opportunity closer to home.

"We believe we're at the start of a long-term commodity boom and the world's going to want to buy what New Zealand is selling."

Whether that was milk powder, meat, kiwifruit or tourism – as the world's economies grew, New Zealand's products would be in demand.

"So in this environment you do not want to be underweight New Zealand," said Stubbs.

Ask what you do want to be underweight in and the most common answer, apart from cash, is fixed interest, particularly government bonds.

Russell Clarke, chief investment officer at Mercer, said the sheer demand for debt was a cause for concern.

"At the moment one of the risk areas is probably sovereign bonds," he said. "Generally in the long term they're safe. In the short term one needs to be mindful of exposures given the amount of issuance. There could be a significant fall in sovereign bonds."

Clarke's point is that governments will have to pay more as they borrow more, which will drive down the price of bonds already in the market, causing capital losses for anyone who has to sell.

There are similar risks for existing bond portfolios when interest rates begin to rise, as they eventually must.

But let's keep the problem in perspective.

"Where we are in the economic cycle affects our preference for equities, stocks and cash," said Millar. "We're currently in an early expansion phase, which is generally good for equities and neutral for bonds."

Doyle put in this way: "The least attractive of the asset allocation spectrum to us is cash – in most environments you're earning nothing. That'll be the bottom of our pile. Bonds, a bit above that."

While investment professionals have different strategies for how to deal with 2010 and beyond, one thing they agree on is that it won't be anything like 2009.

This year was a "one decision year" said Doyle. Anyone who moved back into shares around March will have made a killing, anyone who didn't will be kicking themselves.

Next year will be much trickier.

"We could see there was going to be a short-term cyclical recovery even though there's a longer term bear market," said Millar. "It's typical in a cycle that the second year out is a lot more difficult. The market tends to trend sideways."

SHAREMARKETS IN 2009 (Index/gain on year)

DEVELOPED COUNTRIES

Japan: Nikkei +13%

UK: FTSE100 +14%

America: S&P500 +18%

Australia: ASX/S&P200 +25%

EMERGING MARKETS

Brazil: Bovespa +66%

India: BSE Sensex300 +69%

China: CSI300 +81%

- © Fairfax NZ News