“Rock Star” economy – 19 January 2014

So, the New Zealand economy is to be a rock star this year. It is about time – for years (or decades) New Zealand has spluttered along with a little growth interspersed amongst longer periods of flat-lining or even decline. Without getting too carried away (“rock star” is quite extravagant language) at last the elements seem to be in place to give good growth for at least a year or two.

If you believe the growth story for this year, this begs the question: what are you going to do with these relatively good times? If, like many, your view is optimistic, how should you manage your finances for best effect?

The first thing to acknowledge is that with growth comes higher interest rates. Many people have become used to our current interest rates, thinking that they are the norm. In fact, they are by no means normal – by any standard they are low and most likely to rise. Such a rise will be welcomed by investors, but will be feared by those with mortgages.

Those with mortgages (or contemplating increasing the mortgage) should plan on an interest rate of up to 8%. That figure of 8% is not simply plucked out of the air: it is the estimate from Graeme Wheeler, Governor of the Reserve bank (and he should know better than most).

Loading up on debt at the moment is probably not a good idea. Even though the economy is likely to grow (and, therefore, your income likely to improve) interest rates will increase faster than incomes. If your budget looks dodgy at an interest rate of 8%, you really must start to fix the rate if you haven’t already.

On the opposite side of the interest rate coin, this is not a time for investors to hold fixed rate investments – investors should be wary of buying bonds which have the interest rate locked in for the long term. Instead, they should keep to the short end of the yield curve so that they are ready to buy longer maturity bonds when rates are higher.

Other investments (especially shares) also warrant some caution. A strong and growing economy is generally good for businesses and I think that it likely that 2014 will be another good year on the share market. However, while I will remain fully invested in shares, I am not going to over-do it: this is not a time to sell the kids or pawn Granny’s sapphire broach so that you can pour everything that you have into the share market.

Many shares are already fully valued. The share market has had a great run over the last couple of years but you have to remember that share prices rise in anticipation of growth – i.e. the market is ahead of what is happening at the moment. Much of the expected economic growth that we hope to see is already built in to share prices: we have already enjoyed much of the share price growth that a better economy and higher business profits would dictate.

Moreover, it is election year (how could we forget that!) and uncertainty of electoral outcome will ebb and flow. Markets hate uncertainty and at any time the New Zealand share market may not like a projected result that pollsters publish (let alone the actual result in November).

All running to form, a good economy ought to lead to a higher exchange rate. With the Kiwi dollar well above its long-term average, this year seems a good time for investors to shift some money offshore. Other countries offer good investments along with the benefits of diversification for Kiwis – and a time of currency strength provides a good opportunity.

Finally, do not forget that there is nothing certain that the New Zealand economy will metamorphose from competent covers band to international rock star. While I think it likely that we will probably enjoy good growth this year, we have to remember Niels Bohr’s famous quote: prediction is difficult, especially when it is about the future. Our economy will always be vulnerable to economic shock whether external (from International events) or internal. You can never be absolutely certain that what you (or others) predict will actually happen.

Nevertheless, with caveats in place and without guarantee, I hope and expect that 2014 will be a good year: a time for better profits for business and a time for salary earners to ask for (and maybe get!) pay increases. If, like me, growth is your point of view, it is time to arrange things to enjoy it.

Martin Hawes is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com. This article is of a general nature and is not personalised financial advice.