The world market cap is a good indicator of economic activity, says Nick Stewart.
OPINION
The world market cap is a good indicator of economic activity. It shows comparatively, not just the value of companies but the relative size of one country’s markets to another.
If we compare New Zealand with the United States, we can see that the NZX 50 sits at 0.1 per cent of the world market by capitalisation, whereas the S&P 500 sits at 59 per cent.
This comes down to the sheer scale of markets as well — there’s little chance God’s Own would compete for size with markets like the US. What we need to think about here is comparative returns performance.
From the start of 2020 to now, the US market cap has seen a return of 15.17 per cent per annum while NZ has seen only 0.15%.
You do not have to be a mathematician to see the difference between those numbers … NZ has not had a good few years.
Do we blame Ardern and the Labour Government? Covid? Inflation? The RBNZ? Or all four? Any investment blogs with community commentary will give you a plethora of reasons, most of which focus on the four, with vim and vigour. How about we instead embrace diversification — the only free lunch in the investment world?
Realistically, one country (or industry, or asset class) is always going to perform better than another at any given moment in time. Volatility is part and parcel of investment. If we look at NZX 50 v S&P 500 again over the past five years, we can see that the S&P 500 has returned 54.5 per cent v the NZX 50 17.5 per cent, both expressed in local currency.
If someone had been invested solely in NZX 50 companies over this period, they would probably be feeling some disappointment and potentially envy. It is too risky to put all your eggs in one basket.
New Zealand is a lovely place to live, present economic pain aside. We have beautiful coastlines, unique culture and close-knit communities.
For local connection, lifestyle, and raising wee ones, NZ is great. For your investments, it is a different story, they should be globally diversified across countries, industries and asset classes. This is the best way to insulate your investments from volatility, which we have seen in action over the past few years.
With the advent of PIE funds (tax-efficient global investment vehicles built for Kiwis — think KiwiSaver and the like), the tax impediments and trading hurdles from traditional investment are all but gone. It is easier than ever to trade on global markets; particularly so if you have a trusted fiduciary doing the legwork to make sure your strategy is the correct one for your lifestyle and goals.
That is not to say you should not invest in NZ markets; merely that you should spread your investments around (and therefore spread the risk). Think of it as a fleet of ships. Would you sink your life’s fortune into one and risk it all going down in one storm, or would you play it smart and spread the risk over various ships and ports?
Borders have been open a while now, and many are playing catch-up on the quintessential OE (or moving permanently in the hope of greener pastures). Savvy folks will be looking to become global investors rather than becoming global citizens; while you can’t put a price on memories, you can certainly put value on potential returns over time.
Think global for your investments … though if you are looking to get started or for a second opinion on your strategy, a local fiduciary who can sit down with you face to face is always a great port of call.