Investments

The last ten years!

The events in New York in Sep 11, 2001 reinforced the world economic slowdown after the hectic 90's and dotcom crash and this affected fund values and returns for the following three years. Unfortunately this was reinforced by governance and false reporting by some major US corporates. The uncertainties caused by the Iraq War continued to hold back the predicted US and World recovery until after Mar 2003, and there was good growth from 2004 financed by an artificially low interest rate environment.

This led to 100%+ loans (sub-prime), and with recent falls in Real Estate valuations combined with interest rate rises, has led to an increasing number of mortgage defaults in the US, UK, Australia and now in New Zealand since mid 2008. The lenders (Banks and Finance Companies), can only recover these loses through higher interest rates. Banks carrying these "Toxic loans" could not borrow from other banks, causing a credit freeze.

Emergency funds and deposit guarantees have been introduced by governments in the US, EU, and Australasia to build confidence and ensure credit flow, following major falls in most stockmarkets. The fallout from the "Global Financial Crisis" is expected to continue for some time yet, and the receivership of South Canterbury Finance is the latest casualty.

Australasian funds were also affected and our currency fell as money flew to the safety of major currencies such as the US$. Sharemarkets have recently started recovering from the above credit crisis. Japan did show recent positive growth, but was also affected, even though its banking sector is considered to be stronger, and it is hoped this with China and India can continue to fuel world growth, even at a lower rate. The improving value of International funds will be enhanced when the NZ$ which has been rising recently against a falling US$, eventually depreciates against other currencies particularly the A$ during 2011/12. We expect however to see continuing volatility.

The strong growth of the New Zealand economy since 2003 produced considerable consumer confidence, but this  evaporated in 2008 with GFC market turmoil. Average growth over the last three June years was 1.5%. We are now technically out of recession and we anticipate slow growth through 2010. A boost is expected from the agriculture payouts over the next two years, when our dollar falls and exporters should lead the recovery, and tourism in 2011. (Rugby World Cup). 

Tthe Government is expected to prime the pump leading up to the 2011 election, with Stimulation coming from both the Rugby World Cup and the Christchurch rebuild. This is due to:


* Annual net migration has dropped from its peak of 42,500 in February 2003 to 10,000 in 2006 and is now flat after the Feb 22 Chch earthquake. 
* House prices are soft with total sales also lifting off lows, and building consents are still down 19% from a year ago, prices are steadier in main centres over the last year, the days to sell a house is should drop from 50+, and anecdotal evidence shows some prices may drop further. The 2010/11 summer seasonal surge did not occur and actual sales may rise slowly through to 2011/12.
* Reduced household spending. Driven largely by the comfort people have felt from the increasing equity in their houses - net housing wealth has increased by $89 billion (or 63%) since June 2001- spending has slowed as house prices settle.
* Global growth has slowed due to the credit crisis with little possibility of inflationary pressures. This has been driven largely by the stimulus of historically low interest rates. A global double dip recession is considered unlikely. 
* On a global scale the major economies have lifted out of recession and have low average growth rates. The BRIC countries have re-ignited the commodities boom. 
* And what's going to happen to oil prices? As oils stocks rise some reduction in the current high prices has occurred. Increased demand is coming from China and India and as we have passed "peak oil" prices will remain high. Alternatives such as gas, shale oils, and biofuel are being developed and may assist in meeting future demand. 

Fund Managers are / have reassessed their investments to take into account the changed prospects for various sectors and we are now expect to see a slow recovery which should continue over the medium term. Offshore funds will improve as the NZ$ falls. Commodity stocks should continue to perform.

The credit crunch hangover could continue for a further two years as major banks recover, and governments reduce stimulus. The Fed has dropped interest rates and introduced quantitative easing to assist in the US and this should enable a slow recovery. Rates elsewhere have also been dropped and NZ is expected to eventually close up with Australia, which is now holding higher rates.

Most commentators now predict that the NZ Official Cash Rate may need to rise closer to match Australia in 2012 to head off inflation. Current residential floating interest rates dropped to 5.5% and are now rising slowly but are below fixed rates. Banks appear seem to be maintaining a margin 2.5+% above OCR, and are now raising rates slowly, and dropping fixed rates, as well as relaxing minimum deposit % required.

But there does seem to be an anomaly when rates here are compared with other OECD countries, which are still maintaining very low rates.

New Zealand was downgraded from AA+ to AA by the main rating international agencies. This is in line with downgrades of other countries as the agencies focus on debt. The reason for the downgrade was two fold - an increase in Government debt and the continuing high level of private debt. The immediate effect was that our currency dropped 4 - 5% against the US dollar. This is good news for our exporters. 

Regular contribution products will benefit from the lower unit prices at this time. Lumps sums invested now may have good prospects for capital gain in the medium term. 

The demise of several Finance companies has shaken the confidence of many in the sector, and with the current worldwide credit squeeze expected to cause volatile markets over the next 12+ mths, investing in safer instruments is recommended.

KiwiSaver was started from 1 July 2007, and over 1,700,000 Kiwis have joined already. This is now a major retirement savings vehicle for the future for many Kiwis. Both major parties continue to support it.

The government has provided a number of attractive benefits for all savers under 65, who join. For further details - see our site www.retire.co.nz

Mortgages

Interest rates are now expected to rise slowly and this should continue as pressure comes on the housing sector, and it is certainly the time to look at refinancing, and considering either floating or fixing for a longer term with a prospect of further rises in 2012.

The strength of the New Zealand dollar plus the Chch earthquake seemed to play a large role in Treasury's recent forecasts - something they have downplayed in the past. After its recent drop it is now rising again.

The reaction from the market was also different. The 90 day commercial bill rate hardly moved and the banks reacted far more slowly to raise their floating lending rates. And even now there's a wider difference between banks than we've seen in the past. The costs of borrowing by the banks from overseas has reportedly increased considerably.

As a result of New Zealands rating downgrade to AA, in time it may be more costly for New Zealand to borrow, although this may not occur until mid 2012. We do not see this affecting mortgage rates in the short term. If however the Australia banks are downgraded a notch, then mortgage rates could rise more quickly.

The continuing soft Real Estate market, delays in the Chch rebuild and significant accumulated funds, has led banks to offer very attractive terms for borrowers for residential, investment and other property. Contact us for details.  

Non-bank residential lenders, show a similar range of rates - some higher than the banks. They also offer products banks don't - like no financials, credit impaired, newly self employed, house construction, and higher % home loans, but at a higher cost. Some of these loans are now very difficult to get, and the minimum deposit required has been increased. It's certainly worthwhile shopping around for residential mortgages now. Feel free to give us a call if you'd like some help.

If you are interested in a new mortgage or refinancing contact us.

Medical Insurance

Medical inflation is now averaging 9% p.a. and this is having an impact on many home budgets. The recent major increases in rates by some insurers have forced many to consider other options. The Sovereign Absolute Health Hospital and Specialists plan is certainly very competitive and includes many superior features. New benefits have just been added at no extra cost, and we believe that it is the best value for money product on the market. Many clients are switching to it.

For an instant quote for Absolute Health, comparisons and online application go to our site - www.nzmedical.co.nz by clicking here.

For more details see Medical Insurance at www.adviser.co.nz below or contact us.

Buy Insurance Online

We have developed a new site where you can get instant quotes, compare and apply online. It provides Life, Critical Illness, Disablement, and Income Protection Insurance. Full information, calculators to help you work out what you need, claims forms and policy wording. For those that want to DIY and save. Click on www.nzlife.co.nz

We have also developed a site for Online Medical Insurance. You can get instant quotes, compare benefits and costs, and apply online. Go to: www.NZMedical.co.nz

Our latest site provides a simple no medicals life or funeral insurance cover - see www.goldenlife.co.nz

2011 - the Year ahead.

It is difficult always to try and predict the next twelve months but we believe it may be a slight improvement on the current year.  We are clearly still in a recession - unemployment remains high by New Zealand standards but not compared with many other countries. The Chch erathquake has had a major impact. Currently many retailers and small businesses are finding business conditions tough.  If immigration improves next year this will add some stimulus to the residential housing markets. Our currency is likely to remain firm over the next twelve months which makes it tough for the exporting sector, although export prices remain high, but easier for those purchasing larger imported consumer items. Each month that passes by, the global financial crisis of 2007/8 recedes into history and its ramifications diminish. We feel that next year will be a little better than this year due to some positive economic growth returning, and one off events such as the election, Chch rebuild and the rugby world cup.

Regulation in the Financial Services Industry

In 2011 we have seen the effect of last year's regulation of the financial services industry. All involved in the retailing of financial services (including sharebrokers, financial planners, and mortgage and insurance advisors) have had to become, an authorised financial advisors (AFA), a registered financial advisor (RFA), or belong to a qualifying financial entity (QFE).  Each advisor must belong to a disputes resolution body. The purpose of all this is to provide more protection to individuals investing their own savings and to help restore some faith in the financial services sector.  The CFS team are now qualified as authorised or registered financial advisors (RFA or AFA), and will provide appropriate Disclosure Statements with any service.

Finally, our thoughts are with all our Christchurch clients, friends and families, and we wish all of our clients and readers the very best, for the remainder of 2011. Stay safe. 

Costello Financial Services

Experienced - Trustworthy

Successfully servicing over 7500 satisfied clients since 1970.