Brent Sheather: Australia, NZ keep bounce in the step

Following on from 2008, one of the worst years in United States stockmarket history, we slipped into the first quarter of 2009 hoping that the market lows had been reached in October but worrying that things could get much worse.

In any event the quarter started well when US shares surged in January. But then prices dropped away sharply in February, ominously below the lows set in October. By mid-March equities continued to wallow but other key indicators like the oil price and longer term interest rates had started to rise, suggesting that those markets, at least, were discounting the probability of a deflationary slump like the 1930s.

That was reassuring because when it comes to the crunch many experts believe the bond market to be more sensible than the stockmarket.

Sure enough, within a few days of global bond markets sensing recovery, stockmarkets duly followed and a rally has continued into April. The record shows, however, that in New Zealand dollar terms world equity markets in the March quarter fell by a further 11 per cent to be down 32 per cent from the highs reached in September 2007.

The 11 per cent decline in the March quarter is depressing but the good news is the New Zealand and Australian stockmarkets have performed far better than the world index. In fact after a 3.7 per cent bounce in March the Australian stockmarket, in New Zealand dollar terms, was actually up 1 per cent in the quarter. That is a good effort when the rest of the world is down by 11 per cent.

In fact Australia's longer term record, since 1900, shows that Australian shares have been the top performer of the 30 or so developed country stockmarkets which Dimson, Marsh and Staunton cover in their Global Investment Returns yearbook.

New Zealand shares also outperformed in the March quarter falling by just 3.1 per cent and notably were assisted by Telecom, which managed to rise by 2.2 per cent. Over 10 years however, Telecom's is a sorry tale - a total compound return including dividends of -4.5 per cent a year, worse than the world stockmarket.

For KiwiSavers there was just about nowhere to hide in the first quarter with every major asset class except for cash going backwards. The table shows that the diversified portfolio typically held by a balanced fund spread over bonds, property and shares fell on average by 6.6 per cent, before fees and tax, in the quarter, to be down 14 per cent in the March year.

The loss of 6.6 per cent in the March quarter assumes that the fund managers performed as well as the index in each sector. In fact some KiwiSavers will do better and a lot will do worse, particularly after fees are deducted.

No one likes seeing their savings go backwards but KiwiSavers need to have reasonable expectations in such times: It's virtually impossible to produce a positive result when every asset class is down. If the global market falls most portfolios will fall as shares typically represent 50 per cent of balanced portfolios.

There is a lot of talk about absolute returns managers who claim to produce a positive return in all markets. Such managers are about as common as the dodo, their skill is frequently transitory (that is, it might be down to luck) and the best ones can't be accessed by someone in New Zealand with $5000 anyway. What KiwiSavers can reasonably expect is that if the world stockmarket goes up by 8 per cent their manager will come up with a result a couple of per

cent either side of that over the long term.

Just because your portfolio has made a loss in the March quarter doesn't mean you should dump your fund manager or give up on equities. Down markets are depressing but fortunately there are more up markets than down. Donald Trump may have an appalling haircut but he is also apparently filthy rich and he didn't get that way via bank deposits. He takes equity risk and one of the safest ways to do that is via the stockmarket.

On the New Zealand scene the largest stocks generally outperformed the smaller ones and particularly good returns were had by shareholders in Restaurant Brands (up 25 per cent), NZ Stock Exchange (up 24 per cent), Vector (up 13.4 per cent), Fletcher Building (up 9.8 per cent) and Auckland Airport (up 9 per cent).

At the other end of the spectrum the booby prizes went to Nuplex (down 74 per cent), Fisher & Paykel Appliances (down 64 per cent) and Contact Energy (down 20 per cent).

Both Fisher & Paykel Appliances and Nuplex illustrate the dangers of not having a properly diversified portfolio.

Too many retail investors just own five or 10 stocks and hope for the best.

In the quarter, if you held 10 stocks, equally weighted, and nine did as well as the average (down 3.1 per cent) but the 10th one was Fisher & Paykel or Nuplex, that portfolio would return-9.2 per cent and -16.2 per cent respectively.

Investing is as much about avoiding disasters as it is picking winners.

Lowering risk by diversification is the only truly free lunch in the investment world and the experts say that to get your share you need to own at least 50 stocks.

Unlike last year, there was no respite from equity losses in the bond markets. Locally, 10-year bond yields rose from 4.8 per cent to 5.2 per cent despite the cash rate falling from 5 per cent to 3 per cent. We now have a steep yield curve which means short-term interest rates are well below long-term rates.

With short-term bank deposit rates at 3.5 to 4 per cent, longer dated bonds provide the opportunity to almost double one's income - nirvana for savers and intermediaries.

This attractive scenario may not last too long as the Reserve Bank is not altogether happy with the high level of longer dated bonds and the mere mention of the "quantitative easing" so popular overseas would probably push yields down in a hurry.

* Brent Sheather is an Auckland stockbroker/financial adviser and his adviser/disclosure statement is available on request and free of charge.