Business Editor-at-Large Liam Dann talks to Pie Funds CIO and Founder Mike Taylor about the positives and negatives of the year to come.
Video / NZ Herald / Getty / AP
“If you look at your KiwiSaver at the end of September or October, look at it and now I’m sure it’ll be significantly higher,” says Pie Funds chief investment officer Mike Taylor.
For those who’ve been more interested in the surf report than the market report for the past month,the good news is that Wall Street has been on a roll.
The bad news is that the year ahead is stacked with risks, not least the threat of political turmoils and a Donald Trump victory in US elections.
“I think the odds of Donald Trump getting re-elected are quite high,” Taylor said. “Assuming that he is running against Biden.”
Which is to say, Trump needs to first survive the minefield of legal action that could potentially see him jailed for a range of felonies he is accused of in State and Federal courts.
“If he ended up being the candidate and Biden is still there as the President seeking re-election, then it would look like, based on the polls today, that Trump would be elected for a second term,” Taylor said.
History suggested that US markets tend to remain largely unrattled by political upheaval, but the impact of Trump mark 2 on the US economy was hard to call, Taylor said.
“Last time he was elected was actually quite positive for markets because he was implementing tax cuts. But this time with the US running such a large deficit, I’m not sure that they can actually fund that type of stimulatory activity.
“I’d say probably the biggest risk is what he represents to the world in terms of geopolitical risk rather than market risk.”
There were already significant geopolitical risks with war in Ukraine and Middle East.
From a market point of view these had the potential to cause trade disruption slowing economic growth and potentially causing a fresh wave of inflation as supply chains faltered, Taylor said.
Dwindling inflation and the potential for lower interest rates this year was the big positive narrative currently driving Walls Street, he said.
“People are calling this s ‘Goldilocks’ scenario at the moment where we’ve still got growth, we’ve still got low unemployment, inflation has basically come back to where the US Fed wants it to be and we’re anticipating that there’ll be some rate cuts this year.”
It still wasn’t clear when they’d begin and the US Fed was cautious in its latest statement this week - although it takes any mention of potential rate hikes out of its forecasts.
“That’s a nice tailwind for markets and in essence it’s just pushing up the PE (price to earnings) multiples.”
With the exception of this week’s sell-off, after the Fed’s cautious tone, US markets have been on a strong run.
“The last 12 out of 13 weeks the [US] market has been up, which puts in its best winning streak since 1985,” says PIE Funds chief investment officer Mike Taylor.
“If you look at your KiwiSaver at the end of September or October, look at it and now I’m sure it’ll be significantly higher.
“That is definitely a positive...we’ve now seen the peak in interest rates and inflation has come down.”
When you combine that with positive economic growth and the tech stocks still leading the way things were looking good heading into the new year, he said.
Companies like Nvidia, the chip maker which was in the headlights last year as AI hype boomed, were still on the rise - up around 25 per cent in the first month of the year.
Once you filtered out those big tech stocks markets were still mixed.
We were seeing that with the NZX which continued to track side-ways, Taylor said.
Mike Taylor is founder and chief investment officer at Pie Funds.
Local investors could also expect to see better market returns as inflation fell away and interest rate cuts began later this year, he said.
But it was important to remember that these usually don’t unfold in a straight line, he said.
“In any given year, you should always expect the market to have between a 5 and a 10 per cent correction at any point.”
Traditionally February was not a very good month for investors, he said.
Investors should be watching closely for risks that might have the potential to spark the reemergence of inflation - things like the conflict in the Red Sea disrupting shipping and supply lines.
“But I think overall, putting aside those risks, we can be really reasonably kind of constructive and positive about where we sit from an investing perspective.”
- The Market Watch video show is produced in partnership with Pie Funds
