Don't worry, stay invested

New Zealand market commentators are optimistic about the year ahead, despite international warnings that a crash is “overdue”.

Friday, January 12th 2018, 6:00AM

Citigroup chief economist Willem Buiter suggested this week that investors cut their exposure to sharemarkets.

"There are clearly signs of late-cycle froth in financial markets, in everything from equities to corporate credit and real estate, especially in the US. There is the risk of an overdue correction,” he said.

"We are reluctant to call an end to the bull market in risk assets just yet but a considerable degree of caution is now warranted. Downside risks are rising as the business cycle matures."

But Mercer chief investment officer in New Zealand Philip Houghton-Brown was optimistic about the year ahead.

He said growth was more synchronized around the world than it had been for a long time. “That should lead to continued growth in corporate profits. Inflation is still relatively subdued. These factors are usually quite positive for equity market performance.”

He said he was conscious that the rally that had been running since 2009 was one of the longest and largest on records and valuations, particularly in US equities, were high. “At the same time equities can still rise moderately in 2018.”

Volatility could be expected to increase.

"Although we expect the current economic strength to continue into 2018, we believe that investors should start considering the ways in which they might prepare portfolios for the risks and opportunities that the late stage of this credit cycle might present."

Houghton-Brown was less optimistic about the outlook for New Zealand equities. He said New Zealand's market tended to underperform when interest rates were rising, which was likely this year.

"Because of the high yield, it tends to be favoured by investors seeking yield, so as government bond rates move up, even overseas, that sometimes weighs on the higher-yield markets, like the NZX."

Strong performance had been concentrated in a small number of stocks over the year, he said.

"Although we continue to advocate equity portfolios with a diverse mix of style exposures, investors with a significant bias to low volatility equity - especially where this is captured via an index-based approach - might wish to review the extent to which their equity portfolio is exposed to a rising yield environment."

John Berry, chief executive of Pathfinder Asset Management, said there were good reasons why markets could continue to perform well this year.

"On the flip side, what could bring it to an end? All bull markets must end some time. There's nothing screaming at us at the moment. There are risks out there, but there are always risks out there. When Donald Trump was elected US president in November 2016 a number of commentators said it will be bad for equities and it was time to exit. The S&P500 is since up about 25%. It is impossible to call the end of a bull market, and trying to time the market can prove costly."

He said geopolitical risks, problems with China or interest rates rising faster than expected could change market fortunes.

"Things are still positive in the global share market. On balance, stay invested."

Tags: equities interest rates investment John Berry Mercer NZX Pathfinder Asset Management risk yield