After plenty of disruption from COVID-19, I attended my first in-person investment event in over 1.5 years. Sick of endless webinars and Zoom calls, on Thursday 15 July I made an after work trek to Parnell, Auckland where hosts Snowball Effect and PWA held a “masterclass” covering the “current state of global markets, key themes the PWA team are observing, and how they’re advising clients in the current economic environment”.
In this article I’ll be covering what I learnt in the 1.5 hour session, and sharing my thoughts on the class.
This article is not endorsed or sponsored by Snowball Effect or PWA, is my personal interpretation of the class’ content, and is not to be considered as investment advice.
1. Key takeaways from the masterclass
The class was presented by Jack Powell, a Private Investment Adviser at PWA. The session focussed on a post-covid world where we have record low interest rates, record high asset prices, and signs of inflation starting to show. Here were the key themes:
40% of all money ever created was created in 2020! This is money that central banks around the world have created out of thin air! What has this money been used for?
- Quantitative Easing (QE) – The money is used to buy government bonds. The bonds go up in price and this drives interest rates lower. The intention is to get consumers and businesses borrowing more and/or spending more money.
- Fiscal stimulus – This is “helicopter money” given directly to people (to encourage spending) or to banks (to encourage lending at lower rates).
Not all of this newly created money has been spent. Savings rates have increased throughout world in 2020 (but New Zealanders are still the worst savers in the OECD). This has contributed to asset inflation.
Record low interest rates and record high asset prices
Interest rates in New Zealand have been trending down for 40 years:
- 40 years ago you needed less than $250,000 in cash to generate annual interest income of $25,000. Today you need over $2.1 million to achieve the same return!
- To achieve a 5% p.a. return in 1995, all it took was a portfolio of 100% cash. Today you need a portfolio 90% invested in shares to achieve that same return.
TINA – There Is No Alternative
Low interest rates have also been key to driving asset prices up. As seen above, investors currently have no alternative than to accumulate riskier assets like shares and property, given returns on cash and bonds have become so miserable. However, we may be at the bottom of the long-term interest rate cycle, so the next 40 years are unlikely to be the same in terms of skyrocketing asset prices (although we can’t afford for interest rates to go up too much, given the large amount of debt we have).
The COVID-19 market crash we had in March 2020 was really just a blip. The crash was nothing compared to past crashes (like in the 2000s where we had a “lost decade”, where shares made no return due to the tech bubble crash, followed by the Global Financial Crisis in 2008). Last year we had the biggest ever annual inflow of money into equities with $1.2 trillion going into the market.
This has resulted in the most overvalued market in history according to most metrics such as average P/E ratio, Price-to-Book ratio, and dividend yield. The sharemarkets are only cheap when looking at the equity-risk premium – shares are still good value when you compare them to the low returns of cash and bonds.
Low or negative returns ahead?
When the Price-to-Earnings (P/E) ratio of the S&P 500 is high, based on past data we can expect returns over the next 5 years to be very low. And currently the P/E ratio of the S&P 500 is very high. Bonds yields are also very low, with the Global Aggregate Bond Index’s yield to maturity only 1.22% as at 30 April 2021.
With such high share valuations, and low bond yields, passively managed balanced portfolios may struggle over the next few years.
Inflation and rebounding interest rates
Economic recovery and inflation
We are seeing economies recovering quickly from COVID-19. The global Purchasing Managers Index (PMI) has largely recovered to pre-COVID levels. The PMI gives an indication of business activity in the manufacturing sector, and can be used to gauge how the wider economy is doing.
We are also seeing signs of inflation. The Consumer Price Index (CPI) is rising at the fastest rate since 1982. The CPI measures the price of everyday consumer goods such as food, clothing, and transportation, and is used as a key indicator of inflation. In the year to June 2021, the NZ CPI went up a huge 3.3%. Note that CPI only measures consumer goods – if it measured assets like houses and shares, the annual increase would be around 6-7%!
Rising interest rates
In response to the recovery and the accompanying inflation, interest rates may start rising soon. In a survey of US fund managers, 63% expect the US Federal Reserve to start tapering (slow down their QE programme) in August-September this year. This will reduce the support for low interest rates, and may lead to assets like shares going down, as they become less attractive relative to the now higher return on bonds and bank deposits.
Domestically, NZ banks are expecting the OCR to increase in August 2021 instead of February 2022 as previously predicted. Mortgage rates have already been rising in response to the projected increase. Given 65% of mortgages here are fixed for 12 months or less, NZ is wide open to being impacted by rising interest rates. Therefore house price growth is forecast to be lower in the coming years.
So what’s going to happen next? Unfortunately we don’t know what will happen in the future, but here are the key takeaways:
- No one knows how the COVID-19 situation, and the recovery will end. It’s best to be have a diversified portfolio and remember to take profits.
- Remember your downside risk – We often consider how much an asset can potentially go up, but sometimes forget how much they can potentially fall in value (so don’t expose yourself to more risk than you can handle).
- Will inflation be transitory (i.e. be a temporary blip due to supply chain constraints and labour shortages), or will it stick with us for a longer period? This is a key metric to watch, as it will influence interest rates, and therefore asset prices.
- Interest rates can stay lower for longer (like they have for the last decade post-GFC) – this would be supportive of the currently high asset prices. So there’s no cause for panic and selling off all your shares yet.
2. Did they try to sell anything?
The class was very much focussed on the current state of the markets and increasing financial literacy, rather than being a sales pitch. However, Jack did introduce his firm, PWA, at the beginning of his presentation. In case you’re curious:
Co-host of the event PWA (Private Wealth Advisers), was founded in 2001. They’re a boutique financial advisory firm managing over $775m for high net worth clients (you generally need at least a few million dollars to become one of their clients). They have a capital preservation focus, given their clients don’t really need to accumulate or grow their wealth, but are seeking to protect it (e.g. from inflation) and perhaps pass it onto the next generation.
Snowball Effect was the other co-host of the class. They’re an Equity Crowdfunding platform (which I’ve been investing with for a few years) offering investment into unlisted, earlier stage companies. At the end of Jack’s presentation, Simeon Burnett, CEO of Snowball Effect, gave a shameless plug for his platform, noting that they were now offering investment opportunities into international companies (however, so far these international opportunities have been for wholesale investors only).
– 4 things to know about investing in Equity Crowdfunding
3. Was there any free food?
Greeting us at the door was a flagon of apple cider from Zeffer Cider (who crowdfunded through Snowball Effect), and a selection of refreshing beers including from ParrotDog (an interesting choice, given they crowdfunded through competing platform PledgeMe!).
There were also nibbles on offer – just look at how good the spread was! Chips, dips, cheeses, breads, and crackers were there for all to enjoy. Both the free food and drink were very welcome, and a very much missed aspect of attending in-person events.
4. My thoughts on the masterclass
The global economy and financial markets have gone through a lot over the past 1.5 years, so it was great to get a professional perspective on the current situation and how it might affect one’s investment portfolio.
The session gave me a lot to think about – with inflation, rising interest rates, and record high market valuations, could we have another “lost decade” ahead? With a potentially challenging investment environment in front of us, will active investing be the only way to make money from the sharemarket in the coming years?
The answer to the above questions is that we still aren’t fully out of the woods with COVID-19, we don’t know what’s going to happen next, and we don’t know exactly when and how fast interest rates will rise – so there is no reason to make drastic changes to your investment strategy. But I guess the key takeaway from the class is that investors should be careful not to overleverage or overexpose themselves in what could be a tricky period in store for us.
Overall, it was good to see plenty of young people at the event (these events can sometimes be full of older folk), although there was still a lack of female investors there. The discussion was plentiful with great questions from the audience (and a bottle of wine awarded to the top contributor of questions). There were a lot of charts and statistics used in the presentation, and I have to admit that I found some points hard to wrap head around. But this is not a bad thing, as it meant I learnt something new and found my first post-COVID investment event worthwhile.
My overall rating of the event: 4/5 stars
The content of this article is based on my personal opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with an authorised financial adviser before making any investment decisions.