Money: Springtime after a winter of discontent

Be prepared for a stormy start to the year. There may be showers of negative headlines but by year's end the investment outlook will be much more cheerful.

The view from several investment experts is that last year was like winter for investment returns. But we are moving back into spring and summer.

BT Funds Management chief executive Craig Stobo said 1999 was a cracker year and people who saved did well, but last year was a correction - investment jargon for a bad year and poor returns.

The sharemarkets in the US, Britain, Japan, Hong Kong, Germany and France were soaked in red ink. The exceptions were Canada, which was up 6.25 per cent, and Australia, which broke even.

Mr Stobo said markets were probably near the bottom of a cycle and would pick up. For smart investors, this was "not a bad time to top up while others have a grim face on."

Guardian Trust Funds Management managing director Anthony Quirk expected 2001 to be a "year of two halves."

The first half would be a bit tough and the news peppered with negative headlines. By year's end, there would be a much more positive environment.

Last year, technology stocks stole the headlines. First, investors could not get enough of anything that had an e in front of its name. But after the tech-wreck in April, any e-company was expelled from investment portfolios.

It was easy to see why. The Nasdaq index fell 39.3 per cent and key tech funds promoted in New Zealand, such as the AMP Henderson Technology fund, fell 44 per cent in the last four months of the year. BT's Time fund, which started last March, fell from A$1 to 64c.

Despite the endless stories of e-commerce firms closing, changing plans or struggling to survive, tech was still favoured by investment professionals.

"It's been quite positive to get that cleanout in technology stocks," Mr Quirk said.

He expected the tech sector to bounce back this year.

Mr Quirk said it was hard to ignore the tech sector's importance to the global economy.

New Zealanders continued their drive last year to invest overseas, despite the dollar crashing.

And they invested differently. Instead of sticking money into managed funds which invested globally on a geographic basis, they went for funds made up of global industry sectors.

They had the choice of putting money into funds which specialised in technology, biotech and healthcare.

"There's a lot of interest in cutting the pie that way rather than geographically because of the way companies cross borders," Mr Stobo said.

It resulted in a big rise in the number of funds on the market.

It was not that long ago that fund managers realised that having more than 500 retail funds available was hundreds too many and confusing for investors.

Roll on 2000 with sector, or theme investing, and this situation has been reversed.

The other big development was the type of funds people started using.

Just when you thought they were being sensible making investment decisions on fundamentals, they came back to tax-driven schemes.

Seven firms launched dozens of British-based funds into the local market, and some managers moved money overseas.

This was done to avoid paying capital gains tax. Funds in New Zealand have to pay it. British funds and some Australian ones are set up in a way that they escape this burden.

One thing that did not change significantly was that New Zealanders continued to stash big chunks of their savings in boring old bank deposits.

Part of this was due to the banks' success in marketing their products. The other reason was that it seemed like a safe place to put money while the markets were volatile.

Mr Stobo said it was disappointing that the amount of money in bank deposits stayed up. But the ratio of money in managed funds, compared with deposits, did increase.

Another plus was that banks succeeded in getting savings into new managed funds that were mortgage-based.

ASB Bank and WestpacTrust started mortgage-backed trusts that were two of the most popular managed funds last year.

IPAC Securities said the WestpacTrust Home Loan Trust attracted more than $200 million in its first five months.

New Zealanders continued to have most of their savings tied up in residential property, whether it was their home or an investment property.

Residential property does not look a good bet this year.

In Auckland last year, prices softened and homes became less affordable as mortgage rates rose.

The AMP's home affordability survey - released this week - said that homes become slightly more affordable only in the last quarter, for the first time in 12 months.

The Government's policy of income-related rents for state houses has been forcing rents down. Under the previous Government, state house rents were pushed up by linking them to market rates. Now they are set at a maximum of 25 per cent of a tenant's income.

New Zealand shares, believe it or not, are looking good again after a poor year.

The main reason for the NZSE 40 index falling last year was the strong influence of big stocks, mainly Telecom which makes up 20 per cent of the market.

The stock nearly cracked $10 at its peak last year but has since fallen to below $5.

But investors internationally have been warming again to telecommunications stocks, and Telecom looks attractively priced.

Mr Quirk said another key factor in the local market's favour was the rise of the kiwi. After hitting a low of 39c against the US dollar, it has recovered to 45c. Some brokers expect it to gain another 10c in the next 11 months.

While a rising dollar was bad news for New Zealanders investing overseas, it was great news for foreign investors as it meant that they were guaranteed a profit.

Foreigners largely owned our market and this was potentially a great driver for New Zealand shares.

Mr Quirk said one plus of the dollar's fall was that it was significant in helping to fix the current account deficit - essential to improving investor confidence.

He said the global economic outlook was positive and there was less political uncertainty in New Zealand, compared with a year ago.

Credit Suisse First Boston summed up the view on New Zealand shares in its investment report: "We are also bullish on NZ equities."

What will happen this year?

New Zealand investors will continue to send money overseas, despite the rising kiwi. Technology will enter a new, more positive cycle.

This has already been demonstrated by America's Nasdaq index rising this month. The big difference this time is that money will be made by being selective, as opposed to buying anything vaguely technology related. Fund managers may consider launching index funds they held back on while the Inland Revenue Department clarified its position on the tax-free status of these funds.

The department has decided to allow index funds to keep their capital gains tax-free status for another three years.

The main change is that the department will be much tougher in applying its interpretation of the rules.

The good news is that managers expect 2001 to be a good year, compared with 2000.

But temper your expectations.

The past decade was one of abnormally high returns. This decade is likely to be one of normal returns.

* Philip Macalister is the editor of online money management magazine Good Returns. It provides news on managed funds, mortgages, insurance and trusts and estate planning. You can e-mail him at philip@goodreturns.co.nz