Investment Outlook August 2019 Taking a Deep Dive NZ Equities Australian Equities Global Equities BUY Kathmandu BUY Aristocrat BUY Amazon, Mainfreight, Metlifecare, Lend Lease, QBE Insurance, Mastercard, Unitedhealth Z Energy South32 Group, Walmart - Page 21 -Page 24 -Page 27 Investment Outlook August 2019 Jarden Overview August 2019 Interest rates have dived to extremely low depths as economic growth indicators turned down due to trade concerns and tensions between Iran and the US and its allies. Globally central banks have reacted to this by taking a more stimulative stance, including lowering interest rates. The interest rate falls have caused investors to flock to dividend yield equities, resulting in significant share price appreciation. This has been particularly apparent in New Zealand, which has a high proportion of dividend yield stocks. With dividend yield equities doing so well we have provided readers with an overview of the New Zealand electricity sector, which has a very high proportion of dividend yield equities and some interesting longer term dynamics. Looking forward, we see early signs that economic growth is starting to improve which suggests that interest rates are likely to bottom out before rising modestly. Probably the most significant risk to these “green shoots” is a deterioration in trade negotiations between China and the US. As we go to press, President Donald Trump has surprised us yet again by imposing a 10% tariff on the US$300 billion of goods from China that are currently tariff free. The market reaction has been swift with the oil price down nearly 8%, the gold price up US$32/ounce (reflecting the growing interest in gold assets we review the outlook for gold and associated investment options), a modest rise in the Japanese yen, and the US Treasury 10-year interest rate falling under 1.7%. While this has clearly dented investor and business confidence and makes it more likely that central banks will continue to reduce policy interest rates, we retain our view that a broadly positive resolution will emerge from the current trade negotiations. This reflects our expectation President Trump wants to be re-elected in the November 2020 presidential election, in which case he will want to be able to trumpet some success in the trade negotiations and avoid putting the US economy into recession. Historically, no sitting US president has been re-elected when the US economy is in recession. We acknowledge that the current economic cycle is mature and the economy is probably closer to a recession than it has been for many years. However, at this time there is no definitive evidence of an economic recession in the foreseeable future. Finally, we welcome two new advisers to the Jarden Wealth Management team, Greg Main in Wellington and Anna Boland in Queenstown. John Norling, Director, Head of Wealth Research Jarden Securities Limited | NZX Firm | www.jarden.co.nz 2 Investment Outlook August 2019 Contents Taking a Deep Dive .............................................................................................................................................................. 4 Asset Allocation ........................................................................................................................................................................ 8 Infratil CEO - Marko Bogoievski ................................................................................................................................... 11 Introducing Ted Tsui – Global Equity Strategist ............................................................................................... 13 Global Direct Equity Portfolio ........................................................................................................................................ 14 New Zealand Electricity Sector 101 .......................................................................................................................... 15 New Zealand Equities ........................................................................................................................................................ 21 Australian Equities ............................................................................................................................................................... 24 Global Equities ....................................................................................................................................................................... 27 New Zealand Debt Securities ...................................................................................................................................... 31 The Future of E-Payments .............................................................................................................................................. 32 Gold Rising .............................................................................................................................................................................. 34 Jarden in the Community - Cystic Fibrosis NZ .................................................................................................. 35 Compass by Jarden .......................................................................................................................................................... 36 Calendar ................................................................................................................................................................................... 37 Your Local Jarden Team ................................................................................................................................................. 38 Jarden Securities Limited | NZX Firm | www.jarden.co.nz 3 Investment Outlook August 2019 Taking a Deep Dive Key Takeaways Bad News is Good News Equity markets Equity markets have continued to power ahead, particularly in high dividend yield bounce hard on a markets such as New Zealand and, to some degree, Australia. Over the past 6-9 months rosier outlook Purchasing Manager Indices (timely indicators of economic growth) have declined Economic activity is globally suggesting economic growth has recently softened. This is a reflection of likely to accelerate increased uncertainty from the US-China trade dispute, numerous threats by the US to after a lack lustre impose tariffs, growing tensions in the Middle East involving Iran, and lesser issues such March quarter as Brexit and Italian budget and debt problems. From the US perspective, over three The net result of a years of Federal Reserve (Fed) interest rate rises have probably also taken a toll. The more positive increased uncertainty has seen gains in safe-haven assets, such as gold (discussed on outlook is higher page 34), US government bonds and, to a modest degree, the Japanese yen. No doubt interest rates the dive in 10-year US government bond yields from 3.2% to 1.7% also reflects muted The RBNZ’s bank inflation pressures and an expectation by bond investors that the Fed needs to lower its capital review is Funds Rate from its current 2.0-2.25% band. Other central banks, such as the Reserve likely to result in Bank of New Zealand (RBNZ) and the Reserve Bank of Australia (RBA), also face softer higher lending rates economic growth and subdued inflation, and have either cut interest rates or indicated over time an intention to do so. A common thread amongst central banks appears to be the desire to avoid having their currencies appreciate. Hence, there is a domino effect when large central banks, such as the Fed, cut interest rates. While central bank actions to stimulate economic growth in the face of subdued inflation appears logical, it shouldn’t be overlooked that extremely low interest rates limit the responses available when a recession arrives and can produce unintended consequences. These include the adverse impact on savers income resulting in pressure to save more to achieve the same level of future income, pressure on investors to take on more risk to maintain the same level of investment income, and downward pressure on bank earnings as net interest margins compress. Bank profitability is important in order to have a sound banking system. 18 16 Very Low Interest 14 Rates Drive Up the 12 Savings Rate 10 Source: Bloomberg 8 6 4 2 0 1962 1972 1982 1992 2001 2011 US 10 Year Interest Rate US Savings Rate Historically, it has taken around a 5% interest rate reduction to resuscitate economic growth from recession. With central bank official rates in developed economies being at most 2.5%, or in most cases much less, the scope for this sort of stimulus is limited. The next weapon in the arsenal is quantitative easing (QE), a policy which arguably has had only moderate success in stimulating economic growth in the face of structural Jarden Securities Limited | NZX Firm | www.jarden.co.nz 4 Investment Outlook August 2019 challenges. However, it has successfully inflated asset prices. The lack of success is exemplified by the Bank of Japan, which as a result of QE owns over US$5 trillion of assets (mainly bonds, but also 4% of the Japanese equity market). Despite this, inflation is only 0.7% and economic growth a poultry 1.1%. With monetary policy struggling to have an impact, the next recession will almost certainly require Government’s to increase spending to bring it to an end. “There Is No Alternative” When considering how much investors should allocate to equities numerous commentators have concluded that “There