October 2014 Newsletter
A month to sink our teeth into
After months of relatively sedate markets and news that wasn't that newsworthy, September had us sitting on the edge of our seats, donning our thinking caps, sharing our opinions and sinking our teeth into some meaty issues. For all but the million Kiwis who chose not to vote, September was captivating with a close, ugly but ultimately satisfying election battle (from the perspective of market’s and investor’s who like certainty) with the National Party winning a mandate to lead the country for another three-year term. National's victory will see some positive changes to the KiwiSaver first home buying assistance programs from April next year – we cover that off below.
September was exciting for those involved in the listing of Chinese e-commerce company Alibaba on the New York Stock Exchange. The company, which is described as a hybrid of Amazon and eBay, debuted with a market capitalisation of $US230 billion, making it the largest initial public offering (IPO) in history, and valuing it ahead of 22 of the 30 companies in the Dow Jones Industrial Index.
This was a milestone for Alibaba's founder and executive chairman Jack Ma, the one-time English teacher from Hangzhou who once struggled to raise a few thousand dollars to finance a translation business, and is now China's richest man with a personal wealth of over US$10 billion.
Demand for Alibaba shares was so strong that its shares didn't begin trading for more than two hours as the company waited for a seller to emerge! Investors who bought shares during the IPO process at $68 were rewarded with a 30% gain in a matter of days as the shares peaked at $US99 and settled at around $US90 at the end of the month. We talk more about Alibaba below.
Another newsworthy event during September was the launch of the Apple iPhone 6. Ordinarily the launch of a new smartphone would be of passing interest to investors; however, this launch was significant enough to move markets. Actually it was less the launch, and more "Bendgate" or the phone's propensity to bend in the pocket (in the case of nine phones out of ten million sold) that resulted in the Apple share price falling 3.8% and the Nasdaq index falling 1.9% dragging down even the new kid on the block, Alibaba, which fell by 1.8%. Bendgate coincided with, or perhaps triggered, a change in market sentiment towards the end of the month that saw the market finish on a negative note.
The S&P500 ended September down 1.5% prompting headlines about "the September stock slump" and "the worst performance since January".
Sentiment was not helped by ongoing concerns about the US Federal Reserve (Fed) raising interest rates, with much hand-wringing over the possible removal of the words "considerable time" from the Fed's statement about how long interest rates will likely remain low. Ongoing strife in many parts of the world from Ukraine to the places ISIS is terrorising, including our close neighbour Australia, and the increased risk of global terrorist activity made September a rather more noteworthy month than most of us would care for.
Currency was also centre stage during September as concerns were raised about the strong US dollar and its negative impact on US exports and therefore economic growth. The Reserve Bank of New Zealand (RBNZ) surprised the market releasing a statement calling the level of the New Zealand dollar "unjustified and unsustainable", particularly given falling milk prices. Usually statements from the RBNZ are seen as jawboning and are relatively ineffective. However, this statement worked and the bank managed to push the NZD/USD exchange rate from 0.8075 to a low of 0.7887 in what was regarded as an effective intervention, with rather more bite than usual.
So, an interesting September, but October looks set to be even more interesting with the 2014 Fisher Funds Roadshow about to hit your town. I do look forward to seeing you and thank you for your continued support.
Managing Director | Fisher Funds
F&P Healthcare & Mainfreight - taking local success global. Murray Brown shares his insights following recent research trips.
Your KiwiSaver Portfolios
Highlights and Lowlights
- The New Zealand share market finished the month relatively strongly with the power companies staging a relief rally following the National election win
- Murray visited the Mexican plant of Fisher & Paykel Healthcare and Mainfreight's Californian operation. We continue to regard both companies as high quality, core portfolio holdings.
- A tough month in Australia with the ASX200 Index down 5.5% (NZ). Our underweight exposure to Australia meant that your portfolios weathered the storm well.
- The surprise resignation of PIMCO co-founder, William H. Gross, caused corporate bond markets to weaken as investors fear heavy redemptions at the firm
Open Sesame – A fairy-tale Alibaba debut
Alibaba might well be the largest company you have never heard of. Alibaba has an 80% share of the Chinese online retail market with sales across all of its sites last year totaling $US248 billion (more than eBay and Amazon combined). The company's initial business, Alibaba.com, was a global wholesale online marketplace linking wholesale suppliers with customers. Alibaba also owns several other online assets that cater to the growing Chinese middle class enabling it to "clip the ticket" right through the online retail purchase journey.
Investors were excited about the Alibaba IPO because unlike 1990s-tech-bubble type stocks, this company actually makes money - $US2 billion in the last quarter alone. Having analysed Alibaba, albeit on limited available information, we like what we see and consider it a quality company.
Like a number of Chinese companies, there are question marks about the ownership structure and the lack of transparency in its corporate governance. Alibaba listed in New York instead of Hong Kong because Hong Kong's stock exchange refused to accept its partnership structure. Investors do not own shares in the operating company itself as China restricts foreign ownership. Instead, investors hold shares in a holding company based in the Cayman Islands that has 100% claim on revenues and profits. Still, the risk of the proverbial "40 thieves" has not deterred investors.
Regrettably we don't have a holding in Alibaba, though it's not for want of trying. We expressed interest in the IPO and provided our investment thesis to the investment bankers who insisted on seeing proof that we were interested and knowledgeable about this investment (as opposed to being short-term market speculators). Unfortunately the demand for the shares was so strong that we missed out on an allocation. We do like the company – but an attractive stock at $68 is somewhat less attractive at $90. We expect to buy shares on weakness should the opportunity arise.
The New Zealand Election – Let's rule off on it
The re-election of the National Party and Prime Minister John Key was as much a vote for New Zealand's strong economic performance as it was about Key's personal popularity. Voters ultimately didn't want the economic momentum to stop. The markets were pleased with the election outcome because any change is unwelcome, and the National Party has a clear mandate to govern with the support of its minor party partners.
While the election lead-up was nail-biting for many, it is likely that foreign observers would have regarded the election outcome as a fairly safe bet. With the benefit of distance and perspective, foreign observers would have noted New Zealand's low unemployment and inflation rates, relatively robust economic growth and solid trade relationships with important economies in Asia Pacific. John Key and Finance Minister Bill English are well regarded internationally, and Key was not being overly exuberant when on election night he described Bill English as "the best Minister of Finance in the developed world". The New Zealand government has broadly delivered on its promises over the past six years, which markets like, and investors can now look forward with some certainty as to what the next three years will hold, global events notwithstanding.
So how did markets react to the election? The Monday following the election saw little movement in the currency, or in the bond markets for that matter, and the share market traded on average volumes. All the gentailers immediately rallied following the election, as they were freed of Labour's threat of profit-limiting legislation.
So that's it, a satisfying result but like the market, we're glad it's over.
Oh my, RBNZ, what big teeth you have!
Governor Wheeler played a significant role in New Zealand markets during August and September, prompting one commentator to say that "few central banks have been as successful in getting what they want from the market as has the RBNZ". Governor Wheeler has proven a sound head of the Bank, remaining open and transparent with the market, with his housing policy rules and his first round of interest rate rises signaled well in advance.
It was therefore a surprise when an unscheduled statement was released last month, explaining why the New Zealand exchange rate was too high. It was not another hint or suggestion that the currency should come down; rather it was an explanation of why the exchange rate was "unjustified and unsustainable", which the market read and immediately understood, resulting in a dramatic lowering of the value of the New Zealand dollar within 24 hours.
Another surprise came when a RBNZ report confirmed that the Bank had sold NZD 521 million (probably against the USD) in August which represents the largest month of RBNZ intervention since it first intervened to weaken the currency in 2007. The Bank's timing was impeccable as it managed to capture an 8% fall in the NZD/USD exchange rate and a 5% decline in the trade weighted index. Few central banks have been as successful in manoeuvring currency markets, and this intervention together with Governor Wheeler's successful policy communication have got the market watching closely and ready to do as they're told.
What we're reading ...
From Alan Kohler's Eureka Report
There is a sort of rollicking, circular debate going on in Australia at the moment about whether we have a housing bubble.
Whether it's a bubble or not, or merely demand and supply at work, house prices in Australia definitely are unusually high, which has a number of effects, good and bad: young people can't afford a house, old people get to downsize and retire with more money, everyone feels richer and spends more.
Which is why I want to talk about Germany, and the fact that its house prices have not only NOT been rising, they have actually fallen by 10% in real terms over 20 years.
A while ago Forbes magazine ran a story about a retired American history professor named Robert Locke, who bought a charming little house in Goerlitz, Germany. He was very pleasantly surprised to find the city officials get involved in the deal: they decreed that the price he paid was too high, and they forced the seller to cut it by a third. "Rather than keep their noses out of the economy, German officials glory in influencing market outcomes."
And Germany does not have the same desperate attachment to home ownership that we do. Home ownership across the country is just over 40% and in Berlin it's only 10% – that is, 90% of homes are rented. The tax doesn't favour home owners.
But the most important reason German house prices are cheap and don't rise, is that the government authorities get involved. Across Germany they consistently ensure that enough land for development is being released to meet demand. Germany also has had a policy restricting loan-to-value ratios for years. Banks simply aren't allowed to lend more than 80% value.
The result is that German wages are kept low by comparison with its trading competitors. Governments in Germany interfere in the housing market to keep prices down as part of industrial and trade policy!
As the Forbes article noted: "By virtually eliminating bubbles, the German system minimizes the sort of misallocation of resources that is more or less unavoidable in the Anglo-American boom-bust cycle. That cycle is exacerbated by tax incentives which encourage citizens to view home ownership as an investment, resulting in much hoarding and underutilization of space."
|Fisher Funds view: We like any new ideas and out-of-the-box thinking that can be applied to age-old issues like housing booms and our love affair with home ownership. Not everyone is as fixated on housing as we Kiwis, and in the case of Germany, their economy benefits as a result.|
Managing your KiwiSaver account
First home buyers to get a boost from KiwiSaver
First home buyers were among the big winners from National's win in the NZ general election.
A series of changes to the KiwiSaver first home buyer packages will come into effect from 1 April 2015. These changes are designed to help lower and middle income first home buyers attain their dream of owning a home.
There are three main changes:
- The KiwiSaver First Home Deposit Subsidy is to be replaced with a KiwiSaver HomeStart Grant. This will double the support for buying a newly built home and increase the house price limits;
- Enabling larger KiwiSaver First Home Withdrawals by including the member tax credits (meaning first home buyers will now be able to withdraw all of their KiwiSaver savings except the $1,000 kick-start);
- Expanding eligibility for Welcome Home Loans by aligning the house price caps with the new KiwiSaver HomeStart Grant.
Download our PDF to view the details of the specific changes.
So what do the numbers look like for a first home buyer?
Let's use the example of a couple in Auckland who each earn $50,000.
After five years of contributing to their KiwiSaver account at the minimum 3% rate they will be able to withdraw a total of $32,585 (excludes impact of investment returns) made up as follows:
|Employee contributions over 5 years per person||$7,500||$15,000|
|Employer contributions over 5 years per person (after deducting Employer Superannuation Contribution Tax)||$6,188||$12,376|
|Member Tax Credit per person||$2,605||$5,210|
|Combined savings to withdraw||$32,586|
They will also be eligible to receive a $20,000 KiwiSaver HomeStart Grant, giving them a $52,500 deposit on a new home.
With the Welcome Home Loan scheme allowing only a 10 per cent deposit, they will be able to buy a home up to $525,000 in value.
Getting to know ... Tom and Jack!
Those who have joined the Fisher Funds family by being "defaulted" into the Fisher Funds TWO KiwiSaver scheme will likely have heard from Tomas Thurston (Tom) or Jack Brock. If they haven't heard from them yet, they will, as our dynamic duo get through an average of 250 calls each day. The rest of us get to hear Jack and Tom's dulcet tones as they contact our default KiwiSaver members to introduce Fisher Funds and outline the options available to members to make their KiwiSaver choice less default, and more personal and actively determined.
Jack had a similar role in TOWER Investments and before that had been a top performer for Genesis Energy, outlining options for customers in order that they made the right decision to suit their circumstances. Jack loves talking to people and thinks that his success is largely because he "makes things black and white, whereas others colour it in!".
Tom joined us in April and is a bit of a dark horse in that his interests include creative design and illustration. While we don't have much call for Tom's lovely illustrations, he does provide the occasional caricature for our office white board which provide enjoyment and welcome relief from the day to day business that goes on in our Takapuna office.