Outlookfor investorsfor 2023

OUTLOOK for investors for 2023

Kiwi walletsare in for an uncomfortable couple ofyears.

David Boyle, MintAsset Management. Photo / Supplied

No-one knowsexactly wherethe economy is headedor what that will meanfor people’sfinances.

Economistspredict,however, that interest rates haven’t stopped rising, inflation isn’t going away this year, house prices may not have hit bottom yet,and more volatility is on its wayfor KiwiSaverandshare markets.

Inshort,January 1, 2023isn’t amagic date that’s going to herald the start ofrosy times again. There is, however,lightattheend of the tunnel, most likely aftera couple more painful years. MOREPAINON THE WAY It’s theReserve Bankof New Zealand’s(RBNZ) roletoraise lower interest rates, which it does by setting the OfficialCashRate(OCR). When it raises the OCR, that in turn pushes up interest rates for mortgage, business, and consumerborrowing. Higher interest rates tendtocurtailspending, which helps check inflation.

Few could have missed that the RBNZ has beenraising theOCR steadilyfor thepastyear tokeep inflation under control. Unfortunately economistssay we’re notthere yetand more rises are most likely on their way.

The OCR is currentlysittingat3.5%, but isexpected to continue risingto4.5% or even nearer 5%, says Westpac actingchief economist Michael Gordon. Thepayoffis keeping inflationincheck,which benefits households’ bottom line.

The issuefor the RBNZ and ordinary New Zealandersis how many more OCR rises are needed andhow long this will take to get inflationunder control. “The ReserveBank uses the language:‘astitch intime saves nine’,” says Gordon. “It’s difficult to judge how manystitches are needed.” A GOOD PANDEMIC Economies everywhere have better and worse periods. Gordon points out that here in Aotearoa thebackstory is that New Zealand hada prettygoodpandemic from an economic point ofview.

The economy mostly did wellthrough 2020 and the beginning of 2021. Mortgage rates were low, businesses made profits,people had jobs,and house pricesrose, which made manyfeelwealthy.Followinga short sharp correctionin March/April 2020, share prices and KiwiSaverbalances rose very strongly.

“COVIDwas a kindofeconomicshock that we haven’treally seenbeforein anyone’s livingmemory,”says Gordon.Itwasn’t business as usualfor adownturn.“ COVID was quite different.That ranged from things likeclosuresof global manufacturers,tothe clogged up shippingschedules, throughto work absences, because ofCOVID isolations.”

Interest rates were lower and the government pumped money into the economyatthe height ofthe pandemic.It helped the countrythrougha difficulttime, but ended up beinga doublewhammy for inflation,says Gordon.

“Now it’s about thestory of trying to get ourselves out of that situation,” he says. “We had a pretty good pandemic, but we overdid it. And we’rehavingtocorrect some of that.”

The medicinedoesn’t need to result in recession, says Gordon. Living in an uncertain worldand the RBNZ making human decisions in volatile times, means recessioncan’t be ruled out. NOTE IN THE 1970S NOW No-one knows exactly how high theOCR

and interest rates willgo. Butmostexperts say we’renot living througha period like the1970s, where high inflation year after year was a given. Thistime around,atleast,there’s muchmoreconfidencethatinflation can be reined in, saysGordon.Not immediately, but over thecourse of the next fewyears.

Back inthe 1970scentral banks such as the RBNZ didn’t have the job ofkeeping inflation under control. They do now.“We have a frameworkfor this now.Wehave independent centralbanksthatare given thetools to do what’s needed.Andthey’regiven the freedom todo it,”says Gordon.

“That really changes things interms of sort ofhow much real painI guess hastobe worn torightinflation.” KIWISAVERCRYSTAL BALLS KiwiSaverand stock marketshave seen alot of volatility [sharp ups anddowns]inrecent months.But the overalltrend has been down in 2022,which makes ordinary New Zealanders’ nervous.

Gordoncan’t give financial advice and says thefuture is even lesseasytopredict than inflation and interest rates.

What’s more, inflation and interest rates affect thecompanies that make up stock marketindices and funds such as KiwiSaver differently. “So it’s hard to givea single answer aboutwhatinflation meansfor the share market. There’s goingtobe some, some winners and losers out of it.

“If you’re holdinga diversifiedportfolio, like yourKiwiSaver, then that tendstosmooth out the highs and lows.”

It always needstobe noted as well that there aretwo sidestoa coin.Higherinterest rates mean better returns ontermdeposits for those people who invest their money that way. A GOOD TIME TO INVEST? When itcomes to the outlookfor KiwiSaver and otherstock market-based investments, MintAsset Management’sheadofsales and marketing David Boyle says sometimes ordinary investorsapproachthis in thewrong way.

“I’ve been around inthe industry fora long time and seen how people behave.” That can beto panic and switch, orstop investing when stock markets fall as they have this year. It’s thepolar opposite of what investors savingfor retirement should do in manycases.

“When prices are cheap, or markets are low, that means you’regetting more value.”saysBoyle. “Thosecompanies and investments arestill producing or manufacturing, the goodsand services. It’s just that they’re, their share or unit prices come down.

“The naturalreaction is ‘gosh, I’m gonna get my money out nowand move itto somethingfar more conservative. Idon’t want tolose any more’,”says Boyle. “That’sthe wrong thingtodo if you’re thinking longterm. Byswitching you’re realising thatloss and it takes a long timetoget that moneyback.” Know your timeframe and sit out downturns if you don’t need the money in the near future.

“Iuse the simple analogy,when you’re buyingbaked beansinthe supermarket,” says Boyle. “You’rebuyingmoreiftheprice has gonedown. It’s thesamebaked beans, just thevalue has improved because you’re buying them at a cheaperrate. That’s similar tohowthe marketand KiwiSaver works.”

No-one knowsexactly whenvalues will headup again. It could be measured in years, not months, likeinflation.But theywill. Continuingtodripfeedmoney in when prices are low makes sense. So does beingwell diversified.

“ I’mnot a financial adviser,”says Boyle. “That said, with uncertaintycomes opportunity. If people are regularly contributing they’rebuying more units, because thevalues are cheaper. And as the marketsimprove, their balances will grow faster.”

Photo: Getty Images