05 August 2019

    Paradigm postscript:

    0.5% OCR cut points to change on the way

    I did not expect the exclamation point to my earlier article to be provided so soon.

    Today the Reserve Bank of New Zealand cut the Official Cash rate by 0.5% taking the rate down to 1.0%, the lowest ever. At the same time recent volatility in global markets has given gold a boost, with prices for the yellow metal rising dramatically in recent days.  

    The paradigm shift talked about by Ray Dalio, and highlighted in my earlier article looks, inch by inch, to be coming closer.

    Changes in an economic or market paradigm mean both risk and opportunity. This makes the active management of your portfolio more important than ever.

    We are doing a number of things right now to position your portfolio both for the market conditions today, and for how we see the environment playing out over time:

    1. We were positioned for New Zealand interest rates to fall. As interest rates fall investors make capital gains. We have been beneficiaries of this in two ways. First within fixed income portfolios we own investments with a longer than average term to maturity, which means bigger capital gains. Within our multi-asset portfolios including KiwiSaver, we have favoured New Zealand fixed income versus international fixed income and so have been a beneficiary of big moves in New Zealand rates.

    2. Your portfolio has benefited from a declining New Zealand dollar. We positioned for the New Zealand dollar to fall, which it has following the RBNZ announcement today. A falling New Zealand dollar makes your international investments more valuable back here. This has meant gains for multi-asset portfolios and for our funds investing in shares offshore.

    3. We firmly believe that quality, real assets are an important medium-term safe haven. Low interest rates and currency tensions create risks around strictly financial assets – owners of German ten year government bonds yielding -0.5% are taking a lot of risk! We believe that a portfolio that contains real assets, like shares in high quality companies that are growing and that have pricing power and that include property and infrastructure will be well-positioned as market dynamics change.

    4. Higher cash than normal means we can both absorb and take advantage of volatility. While cash provides next to no return we have more in portfolios than we would normally. Why? It acts as an insurance policy against volatile markets. It is likely that any paradigm shift will mean volatility. More cash than usual also means we can be more flexible and take advantage of fluctuating asset prices.

    5. We continue to layer in inflation protection. Our medium-term view is that governments will increasingly take up the slack of managing variations in economic growth. One upshot of this is that inflation will increase over the medium term. A combination of real assets, with cash flows that rise as inflation rises, and inflation index bonds, which pay a higher interest rate in times of higher inflation, will help your portfolio perform if inflation goes higher. We have been adding both of these to your portfolio.

    We appreciate that we are living through unprecedented times. It will be disconcerting for many of us when we next look at our bank statement and see the very low interest rates that we are earning on our hard earned money.

    With smart active investment management and the right approach to planning your individual financial strategy, we believe this presents as much opportunity as there is risk.

    It is a great time to talk to us and make sure you are well-positioned.