Where to invest in 2020

This time last year, commentators were picking that share markets might return about 5 per cent over 2019. Twelve months later, the NZX50 is clocking off for the year about 30 per cent up.

While that proves only that no-one has a particularly reliable crystal ball, it might make you wonder what could lie ahead for the next year.

Can the markets’ hot run continue? Or is now the time to retreat? And what about the property market?

We asked the experts where investors should put their money in 2020.

Share markets

At the beginning of the year, investors were warned the New Zealand stock market had to come off the boil soon.

The NZX50 ticked off a 22 per cent gain in 2017 then backed up to add a 4.6 per cent lift in 2018.

But, against expectations, it soared another 30 per cent over the past year – the best annual return it has ever recorded. Over the past five years, it has returned 103.8 per cent.

Frances Sweetman, senior analyst at Milford Asset Management, said that was driven by the drop in interest rates through the year.

She said it was unlikely to be repeated – if rates were cut substantially further, it could have the reverse effect because it might spook investors into thinking there was a major structural problem with the economy. But she said the outlook could still be good.

Interest rates were likely to be on hold, there were signs the local economy was lifting, and the United States’ trade war with China seemed to be de-escalating.

‘‘Although with Donald Trump in charge, you never know.’’

Brad Olsen, an economist at Infometrics, said there was the potential for more turbulence over the next 12 months than had been seen in 2019.

He said energy assets were a safe and solid investment. ‘‘Everyone needs power, and current prices have trended higher and are expected to stay at these higher levels. Most of New Zealand’s energy companies are still government owned (with at a least a 51 per cent stake, which provides some comfort around the security of the investment), and investors have seen good outcomes since the companies were floated: Mercury floated at $2.50/share and is now trading at about $4.90; Meridian floated at $1.50 a share and is now at about $4.80; and Genesis floated at $1.65 a share and is now at $3.05 or so.

‘‘Although these returns might not be at the same level as A2 shares and so on, they are a solid longer term investment, especially with New Zealand’s energy companies already thinking about and moving towards even more renewable energy, in line with the Government’s thinking,’’ Olsen said.

Mark Lister, at Craigs Investment Partners, said good returns should continue but at a slower pace – locally and on international markets.

‘‘Equity markets are facing a number of challenges including ailing economic activity in some of the major regions, high valuations and subdued corporate earnings growth. Geopolitical tensions are likely to remain prevalent, which will mean volatility remains high and markets will be sensitive to news flow.

‘‘However, inflation remains low and central banks are focused on keeping monetary conditions highly accommodative. Our recommendation is to remain invested but to position portfolios defensively and expect more volatility. Ensure you are well diversified and stick to quality businesses that are ‘best of breed’. Smaller companies and more cyclical businesses tend to be more sensitive during periods of economic weakness, so conservative investors should limit exposure to these.’’

Property

Commentators expect house prices to pick up again in 2020 – at a rate of anything between 3.5 per cent and 7 per cent, depending on which forecast you listen to.

Olsen said the ability to leverage equity to invest would make housing an attractive option in 2020 for those who could afford it. ‘‘Although construction activity is at historically high levels, New Zealand’s population growth over recent years means the market is still undersupplied in key areas, meaning there is still heat in the market.’’

But the picture is likely to be mixed around the country.

Corelogic head of research Nick

Goodall said there could be strong demand pressures from population growth in Whanga¯ rei, Waikato District and Waipa District,.

‘‘However, with relatively higher values here I think future growth will be somewhat constrained. In the shorter term then, I think the areas with lower property values could see continued higher growth. Here we are talking about Gisborne, Whanganui and Invercargill, where the average value is under $400k in each. The key thing in these areas is to understand the future economic situation – if the local economy cannot sustain the increase in population, then people may leave which would reduce demand and pressure on property values.’’

At Homes.co.nz, data scientist Tom Lintern said Christchurch could see strong gains.

‘‘Median property values have started to increase in Christchurch after a sustained period of flat property prices and I would not be surprised to see significant growth in this market in 2020.

‘‘Small towns in the central North Island have performed strongly in 2019, such as Feilding where values have increased by over 16 per cent, and I see no reason why this won’t continue into next year,’’ Lintern said.

What about a recession?

There have been concerns that slower economic growth could tip the country into a recession but Lister said it seemed unlikely.

Growth was still positive, he said, and traditional indicators were not pointing to recession.

‘‘The US yield curve was inverted – a recessionary warning signal – through the middle of this year, but this is no longer the case and the yield curve is now the steepest since 2018.

‘‘The US unemployment rate has historically been another good indicator of recessionary risks, and it is at a 50-year low of 3.5 per cent,’’ Lister said.

‘‘Here in New Zealand, we are quietly confident there will be an uptick in economic activity. Business confidence has rebounded in recent months, the Fonterra payout is forecast to be the best in six years, unemployment is low and migration remains well above long-term averages. Low interest rates will provide support, and a bit of fiscal stimulus from the Government will also help.’’