Things might be very bleak internationally, but as we close out 2016 there are plenty of reasons to be optimistic about our own economic future, as Sam Stubbs explains.
In spite of recent earthquakes, real and political, I’m as bullish on New Zealand’s economic future as I’ve ever been.
Setting aside the deeply troubling social costs, the markets have decided a Trump administration might be tolerable, and possibly beneficial to share prices in the way Reagan was. At home we have quickly returned to long term trends which have been building for awhile now.
Offshore the environment is very uncertain, but here in godzone, the economy, and investment markets, are now likely to kick into an even higher gear. Here’s why:
1. New Zealand: the safety trade
Low interest rates have forced pension managers overseas to look outside their home markets, to higher risk areas. That includes private equity, venture capital and smaller or emerging markets, like New Zealand.
The amount of money they have to spend on acquisitions globally is truly staggering. In the US alone, there is over $2 trillion of pension money waiting to invest in anything that looks like it generates cash, or a medium term capital return. That’s over 10% of US GDP. Pension funds are desperate for returns, and are diving into uncharted waters to find them. This is where New Zealand has an almost unique global competitive advantage.
When pension funds seek to invest overseas (something they are usually nervous about), they will find New Zealand a comfortingly familiar place. English language, rule of law, no corruption, high dividend yields – all these will make offshore investors feel more comfortable here than in many other markets.
New Zealand is increasingly seen as an oasis of calm, and an authentic place. By and large it’s very easy to do business with. When those with money want to invest outside their comfort zone, these things really matter.
2. The rise and rise of KiwiSaver
Every week another $10m finds its way into the New Zealand equity market from KiwiSaver, and even more into local fixed interest markets. This is like a rising tide – hard to spot minute by minute, but very powerful long term. All boats rise.
For an example of the long term effects of steady saving, look no further than Australia. One way they survived a collapse in commodity prices was no panic selling in markets. That’s because they knew money steadily arrives into their stock and bond markets, and stays there. That’s happening here too.
New Zealand is slowly becoming a capital-rich economy. As much as we love to romanticise our number eight wire mentality, too many entrepreneurs have gone overseas, or sold out to offshore buyers, for lack of domestic investment capital in NZ. That is about to change, big time.
Disclosure: the author is the managing director of Simplicity, a Kiwisaver provider.
3. A licence to print money
Central banks have now had eight years to change their mindset about printing money to support markets and economies. They used to be fearful of it, and used it only as a last resort, such as following the global financial crisis. Now their attitude is very different.
The fact is, markets are awash with cash and central bankers have, by and large, got comfortable with this. They will raise rates reluctantly, and lower them with ease. And they will now err on the side of printing too much, not too little.
The capital markets know this, and are much less scared of central bankers surprising them than they used to be. They will invest accordingly.
4. Market disruption
The markets are quickly re-adjusting to a methods of raising money which sit outside the restraints that listed markets and traditional institutions can impose.
Whether it’s peer-to-peer lending, crowd funding, or direct investment from private equity funds and angel investors, funding the buying and selling of businesses is easier, and transactions are happening faster. And institutions like banks are getting less and less of the action.
If you have a business to sell, now is a very good time to be thinking about hanging out the ‘for sale’ sign, and exploring other ways to sell your wares.
5. It’s election year
Like or not, the Government is unlikely to be able to resist spending at least some of the surplus to sweeten up the electorate, which will help the economy tick along. Plus, with Bill English safely ensconced in the top job, it’s fair to assume any domestic political earthquakes are over.
What are the risks?
There is always the unknown which, by definition, will hit us by surprise. The recent (real) earthquakes were a salient reminder of that.
Trump is a wildcard. I suspect we have yet to see his true colours, although they are distinctly Russian red so far. The markets hate uncertainty, and he is that personified. Reagan, the other potential wildcard elected in my lifetime, had political experience in Californian politics. Trump has none.
But you can protect investments against the unknown by diversification. For example, Simplicity, the Kiwisaver provider I run, is keeping all its funds in 9,000 different investments in 23 countries. Diversify, diversify, diversify and the surprises will be less painful.
The end game
Over time, all this money finding New Zealand a great place to invest in will lead to buyers paying way too much for some businesses. We haven’t yet seen too many eye popping transactions, but we will. That, in turn, will probably lead to a more severe correction than we would like, some distressed valuations, small panics, and another cycle complete.
When that happens though is anyone’s guess, and it will almost certainly be a surprise. But the fundamentals look very bullish for some time yet.
Sam Stubbs is the managing director of KiwiSaver provider Simplicity.