Feature
Thinking outside the box
by Gareth Morgan and Brian Gaynor
Finance tips from Gareth Morgan, economist and chief executive of Gareth Morgan Investments, and Brian Gaynor, executive director of Milford Asset Management.
Will it be possible to make money on your investments in 2009, or should the main objective be simply to preserve what you’ve got?
GM: Wealth preservation should always be paramount. If you focus on that – and I mean in after-inflation terms and with global purchasing power being your goal – then you are most of the way to enhancing your net worth. Having said that, there are times, as in 2008, when the explosion in financial markets is so savage that just trying to survive is hard enough. Hopefully, the worst is over this time around, but only a fool would assume that is definitely the case and therefore spend all their remaining funds on buying up large right now. It’s about being there at the end – tortoise-and-hare sort of stuff.
BG: Yes, it will be possible to make money, but investors will have to think outside the box and be prepared to work hard – do extensive research before making decisions.
Sharemarkets lost enormous value in 2008. Could this be the time to start buying? And if so, what sectors – governments are promising to invest heavily in infrastructure, so could there be opportunities there? New Zealand or overseas equities?
GM: Cash flow and balance-sheet strength are likely to be the key metrics for a few years insofar as owning companies is concerned. Who knows what the shape of banking is going to be, or how we will get there? They’ve leveraged themselves sick, so much so that many are now goners, or at least state-owned. So, it’s best to avoid those firms whose futures are up to their bankers. Having got it so comprehensively wrong, bankers and their regulators – the central bankers who presided over a total deterioration of capital adequacy in the banking system – could do anything now as they crawl out of the pit and try to re-establish a financial system that folks will have confidence in. It will be a long road and one that could produce quite innocent victims – those firms and households that simply had too much debt when the perfect storm hit.
BG: One doesn’t buy the sharemarket, one buys individual companies listed on the sharemarket. There are some companies that have been oversold that are worth buying and other companies that will not be too badly impacted by the recession. There are some defensive sectors, such as food and other basics. Beer companies do well in a downturn, for example. Discount retailers may do much better than upmarket retailers. Yes, infrastructure could offer some interesting opportunities, maybe in the infrastructure-bond area. Unfortunately, New Zealand doesn’t have a diversified sharemarket, so investors may have to look offshore for opportunities.
It’s nice for indebted households that interest rates are being slashed, but tough for investors. How should investors view the fixed-interest market in 2009?
GM: Fixed-interest investors have become a rare breed indeed, so many of them having been dealt the death knell during 2008 as finance companies and smart-arse derivative products sold by ANZ and ING demolished savings. Looking forward, I’d suggest that fixed-interest investors stay with Government-guaranteed deposits for a while longer, and absorb the impact of lower interest rates on their standard of living. To go chasing high yields now is asking for trouble.
BG: There are good opportunities in the fixed-interest market, but investors will have to know what they are doing. It’s a matter of matching good returns with relatively low risk.
Is the corporate bond market likely to offer anything promising in 2009?
GM: The way the banks are behaving, there will have to be a raft of corporate bonds issued. Forget the brand names, just look at the security offered and assess what debt ratio the firm will have after the issue. Only then think of supporting them, and ensure you’re getting a big fat margin over government bonds.
BG: Definitely. There will be plenty of good offerings, but once again investors will have to be smart and do their homework. They must read prospectuses and understand where they are putting their money.
What about rental property? Have prices fallen enough to warrant investment there?
GM: No, they haven’t. A net yield of 8% is the minimum. Forget trying to take anything out of capital gains – the losses aren’t over yet.
BG: The residential property market still has some downside. You mention investment in rental property. Individuals don’t really invest in rental property – they borrow and buy houses, which is quite different. It is not a time for taking on more debt.
Do you have any general advice on investment strategies for retired or nearly retired people whose investment income is being hammered?
GM: Stay frugal, look at working another 10 years, or at least convince your spouse to.
BG: Just be careful, study the alternatives or go to someone you trust for advice. Don’t go after the products offering 10% or more, because they are usually high risk.
Do the old rules still apply? (Get rid of mortgage and other debt first; don’t put all your eggs in one basket; drip feed your investments over time to smooth out the market peaks and troughs?)
GM: Yes, yes and yes.
BG: Yes, definitely.
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