Investment trends for the next decade

RICHARD MEADOWS
Last updated 05:00 16/01/2013
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LONG TERM PLAN: For investors stashing funds away for years or even decades of their lives, the daily drivel becomes all but irrelevant.

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Being short-sighted is a terrible attribute for aeroplane pilots, brain surgeons, and investors.

With all the daily babble about hot stock picks, commodity reports, and interest rate fluctuations, it's easy to get caught up in the froth.

Investors are constantly told that a good financial plan is constructed for the long term.

But paradoxically, 99 per cent of investment analysis seems to be focused on what will happen this year, this month, or this week.

That's fine for the would-be wheeler-dealers. But for investors stashing funds away for years or even decades of their lives, the daily drivel becomes all but irrelevant.

Investors in it for the long haul can ride out the short-term bumps, troughs and dramas - what matters is always the long-term trend. 

With that in mind, we've asked the country's leading investment strategists for their 10-year financial forecast.

While the future is never certain, they've managed to achieve a consensus on the big-picture trends to keep an eye on over the next decade.

THE SLOW CREEP

It has been an extraordinary decade. Traversing all the way from boom to bust, the global economy has been turned upside down and inside out. 

One of the most visible after-effects of the turmoil today is the near-zero or record-low interest rates in place all around the world.

These interest rates directly or indirectly influence just how much cash your investments return, so they're a useful place to start our crystal-ball gazing. 

As the world climbs off its knees over the next decade, the rates will inevitably rise again.

In some countries, the upward creep is likely to kick off within the next 12-18 months. But it won't be the rapid ratcheting up that we saw in the early noughties. 

"The last thing the world needs is higher interest rates, and its going to be quite a long time before it can endure higher interest rates," says Graham Ansell, head of fixed interest at ANZ Wealth.

We will generally see rates remaining "lower for longer", he says.

Inflation is not an immediate threat, and he'd rather see some heat in the economy than deflation anyway.

Home-owners will help keep a lid on the rise, too. With so many people now locked into short term fixed mortgages, the Reserve Bank will be very wary of hitting them hard with a rapid ascent in rates.

"Our view is that we aren't going to see the big movements of mortgage rates from where they are now - 5 per cent - up to 9, 10 per cent," says Ansell.

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Instead, he reckons it's more likely to be in the vicinity of 1-2 per cent. Get too far above that, and people will struggle to service their debt.

"We can't afford it. And if we can't afford it, the rest of the world can't afford it."

END OF A BULL RUN

As interest rates have dropped closer to zero, the returns from investing in bonds have also started to dry up. After a rollicking 30-year rally, the bond market's bull run is coming to an end.

Bond-holders are rolling off longer-term investments that were paying them high single-digit returns, and being greeted with offers for barely half as much.

In time yields will inch higher again, says Keith Poore, head of investment strategy at specialist manager AMP Capital.

That's because the artificially low interest rates that strongly influence bond yields will have to normalise at some point over the next 10 years, he says.

Regular bond-purchasing from the official sector is likely to continue, and will help keep the brakes on the yield rising too quickly.

Poore's picking returns of 3-4 per cent over the first half of the next decade, rising into the 4-6 per cent range during the latter half.

GREAT ROTATIONS

"Will 2013 mark the great rotation out of bonds and into equities?" asks Poore.

Fixed-interest investments, like bonds, have put in a solid performance recently but now they're not looking so flash. 

Investors are always hunting for a good return. Once they roll out of the longer-term bonds, many will be sniffing around for something better until the bond market perks up again.

Poore doesn't think it will be a massive about-face, but mum-and-dad investors in particular are likely to rebalance away from fixed interest for awhile.

The traditional place to seek higher returns - and accept higher risks - is the share market.

Poore thinks there will be a second rotation in equities, away from the safer havens and into the more cyclical countries and sectors that often get thrown around by global fluctuations.

"Some of the defensive stocks and sectors are probably looking a bit rich," he says.

"I still think there will be a search for returns- but maybe less so into the markets that have done so well recently."

And there are bargains to be had if you know where to look. The United States market is probably sitting about fair value, says Poore, but there's room for upside in Europe and Britain.

Emerging markets are also looking pretty good.

"If you think global equities earnings growth is going to be, say 4 per cent over the next 10 years, you should expect double that - say 7 or 8 per cent [in emerging markets]," says Poore.

Combine that with a 3 per cent dividend yield, and you're looking at a total 7 per cent return in developed markets and 10 per cent in emerging markets.

Philip Houghton-Brown, head of investments at fund manager Mercer, says it will be a better decade for equities.

"The challenge will be when you have that adjustment to interest rates."

Like the others, Houghton-Brown thinks rates will inevitably creep up and "normalise" at some point over the next decade.

While they last, the low interest rates are great for corporate profitability and also drive yield-hunting investors into the equity market.

Though rising rates might create some headwinds for equities, they're probably not going to deal markets a crushing blow.

"It's likely to be occurring at a time when growth is on a solid footing, which is positive for growth assets,"says Houghton-Brown.
 
ON THE HOME FRONT

For this little corner of the South Pacific, the forecast is sunny with only a few clouds.

As Houghton-Brown points out, we're well positioned to benefit from the rise of emerging Asian markets, and the Christchurch rebuild will help underpin growth.

But our local sharemarket is a bit of a paddling pool- not wide enough to stretch out in, and too shallow to do much more than splash around.

We're not going to get to Olympic proportions any time soon but Paul Harrison, head of equities at BT Funds, is hoping we'll add some depth and breadth over the next decade.

A bigger pool is better for everyone, and supply and demand are both on the rise.

Retail investors who have long shunned the sharemarket appear to be dipping their toes, or are at least doing so indirectly through their KiwiSaver funds.

"What KiwiSaver has done is create an underlying demand for equities that we probably haven't seen for a long time in New Zealand," says Harrison.

"We'll probably see more of that as it continues to grow."

A raft of new listings will help the supply side, as the rising market is starting to make the prospect more attractive. 

"In the past, we've seen when the market's too cheap then people don't float, because they can get better offers from private equity or other business owners," says Harrison.

The selldown of state-owned power companies Mighty River, Genesis, and Meridian will get the ball rolling over the next couple of years.

The Mad Butcher is looking at a back-door listing, and several other companies are rumoured to be looking at taking the plunge.

Gazing 10 years into the crystal ball involves a fair bit of squinting, and a big geo-political event could always swirl the tea-leaves into a new formation.

Nevertheless, it's much more important to work towards the big picture before getting bogged down with the nitty-gritty.

- This article is of a general nature only and is no substitute for personalised financial advice.

- BusinessDay.co.nz

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