Craigs Investment Partners broker Chris Timms outlines his thoughts for 2016 to business editor Dene Mackenzie.
Many of the investment themes prevalent in 2015 are expected to remain a key feature of markets this year.
Last year was tougher for share investors than had been the case for some time, Craigs Investment Partners broker Chris Timms said.
‘‘The last six years have seen an almost unstoppable rally, with double-digit returns the norm. Since the end of 2008, the local market is up 124%, United States shares are 133% higher and even Australian shares have done very well, gaining 90%.''
However, there were increased levels of volatility and relatively subdued returns from equity markets last year.
A weaker New Zealand dollar against most major currencies helped to buffer returns for New Zealand-based investors but, in local currency terms, returns had been relatively flat from Australia, the United States, the United Kingdom and European markets.
The 2016 themes
● Interest rates are likely to remain low and may go lower: Last year there was a sharp reversal in expectations for the official cash rate (OCR).
At the start of the year, the OCR was sitting at 3.5% with the Reserve Bank having lifted it 1% from a year earlier.
The debate was when the next increase could come and how long it would take the central bank to move into more ‘‘neutral territory'' of about 4%.
Falling dairy prices, much lower inflation than expected, global volatility and a slowdown in domestic growth quickly had the discussion turning to rate cuts rather than more hikes, Mr Timms said.
‘‘While we might see a small rise in interest rates in the US, market expectations suggest New Zealand and Australia will see cash rates lower. In Europe and Japan, interest rates are already at zero and there is talk of further stimulus on the horizon.''
● The recent volatility could be here to stay:Market volatility increased last year but rather than being a short-term dynamic, it might simply be a move back to normal after a few unusually quiet years, he said.
In 2015, there were moves of more than 1% in either direction for the S&P 500 26.7% of the time, a substantial increase from the average of 16.7% in the three preceding years. That went some way to explaining why markets had been something of a roller-coaster ride last year.
One of the hallmarks of the Federal Reserve's quantitative easing programme had been quieter, more stable markets with very low volatility.
‘‘We may see sharper reactions to good and bad news from share markets, currencies and commodities.
''Instead of a subdued response to a disappointing piece of economic data, or an upbeat comment from a central banker, there will likely be more strong days and more rough days for investors.''
● Dividends will provide a large proportion of total returns:Share prices were generally above long-term averages in many regions, Mr Timms said.
Combined with the prospect of lower economic growth over the coming few years, that would likely mean more modest investment returns than had been experienced in the past six years. It was also likely an even greater proportion of returns during the period would come from dividends.
● The New Zealand dollar could continue drifting lower:Further modest downside for the kiwi was expected against the US dollar.
The Reserve Bank was forecasting an 8.5% fall in the kiwi within 12 months with likely catalysts being another cut to the OCR, subdued dairy prices and a rate hike from the Fed.
Given the small, vulnerable nature of the New Zealand economy, international investments were an excellent hedge against adverse events. There were also significant diversification benefits to be gained from exposure to sectors not available in the local market.
New Zealand companies with global earnings would benefit from the trend. Exporters of non-dairy products should do well and those exposed to tourism would experience increasing benefits.
● Geopolitical risks could increase: ‘‘We see a number of risks to investor sentiment and market stability across geopolitical hot spots and believe these concerns could emerge as a driver of heightened volatility in the coming year.''
Those hot spots included the ongoing tension in the Middle East, rising tension between the US and China, and the Russian military build-up.
The frequency of such issues could rise, or at least remain elevated, in 2016, Mr Timms said.
● The New Zealand economy is set to remain resilient: The economy remained in much better shape than many others around the world.
The currency had fallen, providing support to many sectors, including tourism and most exporters.
Craigs expected the New Zealand economy to slow this year, although it was still in good shape and many of the good quality companies were positioned to perform well.
● Developed markets will continue to outperform emerging markets:Historically, emerging markets performed well during periods of US dollar weakness and poorly during periods of strength.
Given the strong performance of the US dollar in the past year, and the expectation it would continue to strengthen, Mr Timms believed emerging markets would remain challenged in the coming year.
● Oil and hard commodity prices are unlikely to recover in 2016:Few people predicted just how much weakness would be seen in the commodity sector. Oil prices continued to fall in 2015, with Brent crude falling a further 22% to settle in the mid-$US40 range per barrel. The price of oil had more than halved in the space of 17 months.
Further downward pressure on oil and commodity prices was expected this year, providing ongoing challenges for oil and resource companies.
As a net importer of oil, New Zealand was also a beneficiary of ongoing weakness in oil prices.
Last year, Reserve Bank governor Graeme Wheeler noted should oil prices remain at about $US50 a barrel, the cost of New Zealand's annual petroleum imports would fall by about 1% of nominal GDP.
He suggested that would represent a boost to household disposable income of about $600 a year per household.
While prices and the currency had moved since those comments, the general theme held true, Mr Timms said.
