KEY POINTS:
The crumbling housing market and failed finance companies have sparked a flight to quality and advisers say that they're not the only sectors investors ought to be concerned about.
There's no guarantee the credit crunch that has emerged from the United States and stretched its tentacles into Europe and elsewhere will be the cause of the next big crash. No one knows when that might be.
But we might well be heading for a summer of setbacks in the financial markets. The finance company sector has already set the ball rolling and the residential property market looks like it may be on its own way down.
Property
Investors who need a one-off review of their property portfolio will often see a mortgage broker - although some prefer mentors and other advisers.
The best defensive position to be in is having cash-flow positive properties - or at the very least cash-flow neutral, says Stuart Wills, director of Mortgage Link West. That way the rent is funding the outgoings.
Investors with negatively geared properties need to get themselves into a position where they can weather a lack of income, says Wills.
For some, this may mean selling down properties to ensure they have enough equity to pull their properties back into positive equity.
Other options include setting up overdrafts and revolving credit accounts that could be used to cover mortgage and other costs in the short term. "You need to do it before the crisis. If you don't, it can become expensive or your credit gets impaired before you have a chance."
Wills also recommends capitalising mortgages, sometimes called cash-flow mortgages, for some clients who are expecting a temporary drop in income. These mortgages allow a percentage of the interest payments to be capitalised against the mortgage and paid back eventually when the property is sold.
Such mortgages should be viewed with caution because the equity in the property is being eaten up. Should the capital value not grow, the investor is building up debt on the property to the point where the property may end up in negative equity - being worth less than the mortgage owed on it.
Equities/funds
When it comes to equities and funds, not everyone believes there is a need to take shelter in defensive stocks.
Wayne Ross, financial adviser and director of Select Asset Management, says his company is maintaining its tactical asset allocation - even though he expects there is still some "unwinding to go to see who is holding the baby" - meaning he expects more volatility in financial markets.
AMP Capital Investors investment strategy head Leo Krippner said he saw no reason at the moment to take up a defensive position, although he favoured asset allocations that were underweight in fixed-interest investment and overweight in New Zealand commercial property.
He said investors who wanted to take a defensive position should look for sectors providing consumer staples that people had to use. Examples include utilities companies such as Telecom and energy stocks.
Krippner said picking the share type was more important than choosing between onshore and offshore equities.
Debt securities
Fortunately, says director of First NZ Capital Graeme Beckett, a lot of good-quality debt has been listed on the debt securities market this year.
He says investors looking for defensive positions are making a flight to quality. Only those issues rated investment-grade by international ratings agencies such as Standard & Poor's (S&P) or Moody's are getting a look in. "Our order book for customers is almost 100 per cent overwhelmingly for quality [debt securities]."
Investors are looking mostly at AA-rated or higher investments such as Rabobank, ANZ and BNZ debt securities, says Beckett. Just this week Rabobank, AAA-rated by S&P, listed $900 million of debt securities and Origin Energy, whose preference shares have issue ratings of BBB-2, raised $1 billion of capital on the NZDX.
Rabobank raised more than double the capital it set out to, accepting over $500 million of oversubscriptions. The Origin Energy offer was also fully subscribed. But bear in mind Britain's Northern Rock bank, which has an investment-grade rating, was engulfed by a funding and customer confidence crisis and had to be rescued by the Government.
One of the best safety strategies, as Beckett points out - and is also a basic tenet of Investing 101 - is to diversify. Investors who have their investments well spread are unlikely to lose all.
Finance company debentures
Finance company debentures probably aren't at the top of most investors' defensive lists at the moment. Too many have fallen over and taken millions of dollars of investors' money with them.
Some commentators say companies such as South Canterbury Finance and UDC that offer what are seen as the safer debentures may suffer from the malaise that has hit the entire industry.
It's hard to know how far up the food chain investors need to go before getting a relatively "safe" debenture. As one commentator who didn't want to be quoted said, the more finance companies that fall, the more of a self-fulfilling prophecy collapses become.
But Chris Lee, managing director of Projects Resources, who has been critical of many of the finance companies that have collapsed in recent months, suggests the top tier of finance companies are still good investments. "There is no significant risk of South Canterbury Finance, Strategic or UDC being knocked over ... We would be facing financial Armageddon if we saw those three companies knocked over."
