Mark Lister

On Investing

Mark Lister: Show 'n' tell time for forecasts

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Trying to forecast market, currency and economic movements is difficult. That's probably why they say economists only exist to make weather forecasters look good.

Peter Lynch, the legendary Wall St fund manager, once said: "In this business, if you're good, you're right six times out of 10. You're never going to be right nine times out of 10."

So accepting that I'll inevitably be wrong, but aiming for six out of 10, here are 10 investment themes for 2012. First, let's recap what I wrote in January last year ...

* Shares finish the year higher than they started. Wrong.

For all of the drama, the United States market finished the year exactly where it started, while New Zealand shares were down 1.0 per cent. Many of our best companies did much better - Auckland Airport was up 20.0 per cent, Mainfreight up 29.8 per cent, Port of Tauranga up 38.1 per cent and Ryman Healthcare up 20.1 per cent.

Investors that focused on good, strong companies would have still had a few bright spots across their portfolios.

* The NZ dollar weakens. Right.

But only just. Against the US dollar our currency fell 0.4 per cent over 2011. It went below US$0.72 after the Japanese tsunami and Christchurch earthquake, before rising to US$0.88 mid-year then falling back to US$0.78, where it began the year.

* Interest rates start to move up. Wrong.

The Christchurch earthquake led to an emergency rate cut of 0.5 per cent, and disruptive aftershocks, slow progress on rebuilding activity and global uncertainty stifled our economic momentum so any planned rate rises were shelved.

* House prices are uninspiring. Right.

House prices increased 2.4 per cent in 2011, according to QV. A stable enough outcome to make America jealous (they haven't had positive house price growth since 2005), but subdued compared to the double-digit gains from a few years ago.

* Europe muddles through. Half marks.

No one has defaulted (yet), the common currency still exists and Europe isn't in recession based on data released to date.

So technically, they have muddled their way through. However, the situation is a mess and we should soon have confirmation that economic growth is going backwards.

* The US government gets more done this year. Wrong.

US politicians spent most of the year arguing over how to reduce spending, then ran out of time and lost their credit rating.

They then created a "super-committee" and gave it three months to tackle the problem. The day before their deadline, they conceded no agreement was reached and another round of political finger-pointing ensued.

* National will be re-elected. Right.

Given the political issues across the world, having stable leadership cannot be underestimated, regardless of personal political allegiances.

* Partial SOE sell-downs brighten the NZX outlook. Right.

In January, the Government got serious about the mixed-ownership model, the public mandate was given in November and Mighty River Power is likely to list in the September quarter. The NZX share price rose 57.1 per cent over 2011.

* Merger and acquisition activity continues. Right.

According to Bloomberg, there were 4 per cent more global deals done in 2011 and 11 per cent more in New Zealand. We saw successful deals such as the Charlie's takeover, interest in a number of other local companies, significant new listings including Trade Me and the demerger of Telecom.

* The All Blacks win the Rugby World Cup. Right.

Although it didn't give the economic boost many had hoped for, it was a successful and enjoyable tournament that provided a welcome distraction from the daily mood swings of the financial markets.

So that's six and a half out of 10, an acceptable result. The Christchurch earthquake, Japanese tsunami, revolt in Egypt and the sovereign debt crisis in Europe made for a fairly eventful year that was difficult to navigate. And so to 2012 ...

1. Recession in Europe, while the US economy surprises us. High unemployment and austerity measures are a grim combination for Europe. The US, despite high debt levels and unemployment, is in much better shape. Growth won't be outstanding, but it will be better than many are expecting. Europe represents less than 20 per cent of US exports - significant, but not overwhelmingly so.

The UK, more worryingly, sells more than 40 per cent of its exports to Europe.

2. No break-up of the Eurozone in 2012. There is a possibility that Greece is forced to exit this year, with one or two small nations following in 2013, but the high costs make this unlikely.

3. No "hard landing" for China. Quite an important one for Australasia, given our export links. Growth won't be as high as the 9 per cent from 2011, but it will still hit 8 per cent, which should see a hard landing averted. The authorities have sufficient tools to manage the situation and inflation has eased enough for them to make use of these. Emerging market shares and companies selling into those regions could be a good bet mid-year.

4. Shares have a positive year. The NZ market delivers at least a 5 per cent return, while the US market goes up by closer to 10 per cent. Despite a subdued growth environment, high dividend yields and strong finances of good-quality local companies should ensure that many still perform well. It's an election year in America and, for what it's worth, US shares have fallen in only three presidential election years since 1952 (1960, 2000 and 2008).

5. Interest rates remain very low. Alan Bollard probably won't need to do much work this year. The Official Cash Rate (OCR) will be no higher than 3.0 per cent, and it might not even get to there. Great for borrowers, but savers will continue to face modest returns from bank deposits. Australia will cut interest rates, so will Europe, India, China and Brazil. Interest rates in the US will remain at zero, making "real" (after-inflation) interest rates negative. Negative real interest rates in the US suggest another good year for gold prices.

6. The NZ dollar rises against our major trading partners. We are in a stronger position than many other developed countries and our currency will continue to reflect that. But it will be flat to weaker against a more stable US dollar, while rising against the Australian dollar, the pound and the euro.

7. Fixed interest doesn't repeat its 2011 performance. Fixed interest remains a solid choice for conservative investors and will probably serve them well again this year, but rates falling the way they did in 2011 and another chart-topping double-digit return is unlikely.

8. Obama is re-elected US president. This will be a tough road, with unemployment at 9 per cent and his approval ratings in the mid-40 per cent range. Only one president in modern times has had ratings this low and been re-elected - Ronald Reagan in 1984, and the economy was much stronger then. However, because I think the US economy is improving and the Republican field looks weak, I believe Obama will win in November.

9. Mighty River Power will generate huge investor demand, but don't forget Fonterra. Mighty River Power will be hugely popular, especially with those new to shares. But it might not be the only game in town. Legislative changes enabling Fonterra to introduce share trading between farmers could occur this year. This would pave the way for a Shareholders' Fund to list on the stock exchange, allowing the public to invest in what are effectively non-voting Fonterra shares.

10. Inflation falls back to low levels. Inflation will fall back to well within the 1-3 per cent target range and support the case for minimal OCR rises. We all know inflation statistics underestimate the real cost of living. All the necessities (food, electricity and rent) keep rising and the only things getting cheaper are the ones we don't need (like TVs).

Mark Lister is head of private wealth research at Craigs Investment Partners. His disclosure statement is available free of charge under his profile on www.craigsip.com. This column is general in nature and should not be regarded as specific investment advice.

- NZ Herald

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