A routine task for financial journalists at this time of year is to write a summary of the year in markets and to survey economists on their expectations for the coming year. These so-called 'year-enders' are worth revisiting 12 months on.
If you think back to late 2018, the mood was unremittingly gloomy. Global sharemarkets had posted their worst annual performance in seven years. When journalists and economists were writing their year-end reviews, markets were particularly volatile. The fourth quarter was a difficult one amid headlines about the US-China dispute, Brexit, interest rates and warnings from IMF of a slowdown in global growth.
Alongside global issues, the New Zealand economy slowed down more than expected in the second half of 2018 mainly because of two unforeseen developments – low level of business confidence and record-level rise in petrol prices in October. All in all, it is estimated that annual GDP growth slowed down to 2.2 per cent at the end of 2018 – its slowest pace in five years.
Against this backdrop, many economists were pessimistic, and some were optimistic about prospects for 2019. PwC published their predictions for 2019 saying global growth will slow and trade conflicts will deepen. In another economic update published by Westpac stated that financial markets have overplayed the downside risks and the global growth will keep ticking over, albeit at a slower pace.
It was an ominous mix of negative and positive headlines and you can see how all those contrasting reports might have prompted investors to seek a safe harbour while the uncertainty passed.
The problem is 2019 didn't turn out that bad or good. Yes, a year on the US-China trade dispute is still grinding on. Yes, Brexit is still hogging the headlines. Yes, you don't have to look far to find downbeat commentary on the global economic outlook.
But with the fourth quarter at the finish line, global sharemarkets have had a pretty good year. The US market was at record highs at time of writing, having risen about 25 per cent in 2019. The Australian market was up around 20 per cent and the NZ market about 28 per cent higher. Historically, NZ stock market reached an all-time high in December 2019. Interest rates also failed to match the forecasts. According to the Wespac's economic overview, the Official Cash Rate (OCR) would remain on hold through 2019 at 1.75 per cent. As it turned out, the cash rate was cut two times in 2019 to a record low of 1 per cent, which sent the kiwi dollar to a three-year low.
Of course, we don't know whether this will continue. Markets change as news changes. But it does offer a reminder about the risks involved in setting your investment strategy according to the headlines of the day. If you had acted on last year's gloomy commentary, you would have missed a year of substantial gains in the global markets.
The truth is news is about the past. What has happened is already reflected in prices. No one knows what the future will bring. You can speculate, of course. And you may get lucky. But that's not really a sustainable way of investing.
A better approach is to build a diversified investment portfolio that matches your risk appetite and that maximises your chances of getting to your goal. Focus on things you can control, like costs and taxes. If shares have had a great year, your adviser might recommend rebalancing to ensure you're not taking any more risk than you intended.
It also pays, as we've seen, to view investment year enders with scepticism. The economists quoted are doubtless smart people. And their assessment of the risks around geopolitics and economics may be valid.
But the truth is the market already knows all of that. The headlines, and the views of all the economists and analysts and journalists, are already reflected in today's prices. They can make educated guesses about the outlook, but they're still guesses.
Follow the news by all means. It's good to stay informed. But be wary about using the news as an investment barometer. Listen to your adviser instead.
• Nick Stewart is an Authorised Financial Advisers and CEO at Stewart Group, A Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions. • This article is prepared in association with Dimensional Fund Advisors. The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz