Last Friday was the shortest day of the year, but while daylight hours increase, the worst of winter is yet to come.

When thinking about the path of financial markets over the second half of the year, it feels as if they might follow a trend similar to the weather.

We've avoided the worst-case scenario at the Greek election and markets are looking good value. But it seems we are in for some more weakness before we see any sustainable rebound.

Just like winter, it's a little early to call the bottom of the market just yet.


But despite all the worries, investors haven't done too badly this year.

As one would expect, fixed income has performed well, but NZ listed property is up 11.1 per cent, United States shares are up 7.3 per cent and Australian shares are up 1.6 per cent.

Local shares have posted a 3.8 per cent gain, and investors haven't had to stray too far from the good quality ones to achieve strong returns either.

Retirement village operators Ryman and Summerset have gained 29 per cent and 22 per cent this year, healthcare company Ebos is up 17 per cent and utility companies Port of Tauranga and Trustpower have posted gains of 11 per cent and 9 per cent.

When considering where markets go from here and how investors should be positioned, Europe remains the eye of the storm.

European sovereign debt is 87 per cent of gross domestic product (GDP), which is lower than the United States' 102 per cent.

However, the US is at least growing slowly, unemployment is more stable - as is the banking sector - and the American political leadership is slightly less dysfunctional.

The debt crisis in Europe is manageable, but the political divide makes this much more difficult, and the stronger nations have some difficult decisions to make.

They are either all in it together, or they're not.

For the union to survive in a sustainable manner, the wealthier nations need to throw their support behind their weaker peers and share the debt burden.

Even if things go well, Europe faces years of poor economic growth while it crawls back into the black.

Luckily we export only 7 per cent of our goods to Europe and 3 per cent to the United Kingdom, which is likely to be dragged down by its proximity.

China has also been slowing, with manufacturing data last week showing new export orders dropped in June and inventories rose.

The uncertainty created by Greece and Spain will have undoubtedly played a part in this more cautious business and consumer activity.

The Chinese economy has been slowing since 2010, although just how far it slows and how quickly is what markets are watching.

It has so far fared better than many were expecting, and the International Monetary Fund sees growth slowing to a still outstanding 8 per cent this year, before rising again in 2013.

However, markets remain cynical and want to see clear evidence of stabilisation, followed by upturn.

In contrast to just about everything elsewhere, New Zealand and Australia have proved to be bright spots.

Australian economic growth for the March quarter was expected to be 0.6 per cent, but it was more than double that at 1.3 per cent.

Economists expected the equivalent figure in New Zealand to be 0.5 per cent, but again, it was more than double that at 1.1 per cent.

So the United Kingdom and Europe are in recession, China and the US are missing expectations, but Australasia is posting growth rates twice as strong as the economists expect.

Things are a little slower than we would like, but we're not in a bad spot.

I expect shares to finish the year higher than where they are now, although the next few months could be volatile.

This isn't necessarily a bad thing, especially for investors looking to pick up good companies more cheaply than they would have three months ago.

Quality companies in the right industries will still be able to deliver modest earnings growth over the coming year and, with New Zealand shares offering annual dividend yields of 6.5 per cent, they will probably remain well supported.

With interest rates likely to stay at low levels well into next year, there aren't a lot of other options for people living off their investment income.

Even though Australian shares look cheap, sentiment might remain against them until investors see evidence Chinese growth has bottomed.

Because of their commodity exports, China is crucial for Australia.

Most economists expect some confirmation of this over the next six months, at which point Australian shares would look very interesting given the current price/earnings multiple of 10.8, which is almost 25 per cent below the 20-year average.

Interest rates in Australia are falling quickly, with the cash rate having so far fallen from 4.75 per cent last year to 3.5 per cent currently.

That reduces the monthly payment on a A$400,000 floating mortgage by A$264, , which hasn't yet flowed through to spending habits and living costs.

Given all the risks, many investors have shunned growth assets such as shares and property in favour of bank deposits and fixed income.

This has been a good strategy, with fixed income performing strongly as interest rates have continued to fall.

But this flight to safety has been so pronounced that some are now questioning whether the safe assets have become unsafe simply because their prices have increased substantially and yields - the interest rate they're paying - have been pushed down to very low levels.

A 10-year German government bond is paying a rate of 1.58 per cent a year, and the US equivalent isn't much better at 1.67 per cent.

After tax and inflation the real return is negative, but investors are so focused on ensuring they get their original investment back they are not concerned by this paltry return.

Compare this to a share in a company such as Coca-Cola, which has a great business, global diversification, arguably the strongest brand in the world and low debt levels.

Coca-Cola has increased its earnings by an average of 10 per cent a year since 1990 and is paying a dividend yield of 3.5 per cent, more than double that of a US government bond. It requires an incredibly pessimistic view to believe that a US government bond paying 1.62 per cent a year will deliver a better return than Coca Cola shares over the next decade.

Even if Coca-Cola's share price is unchanged in 2022, its yield alone should ensure that it comes out on top.

A fixed income portfolio should always include a range of laddered maturities, including some of these longer-term bonds with depressingly low rates, just in case low growth and low rates persist for a long time.

But just like overseas, value has become very difficult to find in the New Zealand fixed income market and in short, it looks expensive.

While it could stay expensive for quite a while, just as shares did in the years leading up to 2007, at some point these yields could rise again.

Investors need to acknowledge this risk, and should consider holding a few less long-term bonds than usual.

With the outlook for growth assets like shares and property looking uncertain, and safe assets like fixed income looking pricey, it's a difficult time for investors.

A client recently asked me how on earth I could condone investing anywhere but under the mattress, given the abundance of risks around at the moment.

The truth is that there are always plenty of things to worry about. Five years ago, it was the overheated housing and share markets, five years before that it was the dotcom bubble, five years before that the Asian banking crisis, and five years before that it was early 1992 and New Zealand was in recession.

Despite all of that, there have still been opportunities to outpace the mattress over the past 20 years.

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