Written by Tom Stanley, Investment Adviser, 13 July 2022
I know I have written previously about headline induced anxiety, but I opened the ASB Securities Morning Brief on Saturday morning, while it was a miserable, dreary morning, I was genuinely taken aback. Below are some of the headlines I read:
- House prices now dropping rapidly as correction kicks in. Average home values across the country have dropped more than $52,577, down 4.9% since the beginning of this year, according to QV’s latest House Price Index – read more
- A third consecutive 50 point rise taking the Official Cash Rate to 2.5% is universally expected – read more
- Over half of New Zealand retailers are not meeting their sales target due to inflationary pressures and with no signs of inflation slowing down, consumers are having to help bear the brunt of the costs – read more
- Cost of Living: MYOB poll shows more than 1 million Kiwis actively considering leaving NZ – read more
Fortunately soon after reading these headlines, I dove into Joe Calhoun’s weekly market update titled ‘Things That Need To Happen’. While Joe looks at the world from a US investors lens, I always appreciate his insights and PERSPECTIVE. Early in this week’s note, Joe highlights “if you have a preconceived notion about the economy (negative or positive), you will see all data through that lens.” In psychological circles, this is known as confirmation bias, where we often look for things that support our view – as an example Joe looked at the cost of shipping a 40 foot container from Shanghai to Los Angeles:
“I have seen this (chart) or similar versions on Twitter over the last couple of weeks, always cast in a negative light. It purportedly shows a drop in demand in the US as the cost of shipping goods from China is falling rapidly. The price is down about 15% over the last year. This is confidently cited as proof of slowing demand in the US and more evidence that we are headed for recession.
If you look at the entire set of data though, a different picture emerges. Yes, prices have come down but are still well above the pre-COVID level. In fact, the cost to ship from Shanghai to LA is still roughly 4 times the pre-COVID price. There could be a myriad of reasons why shipping costs have fallen recently but I have a hard time classifying this as bad news. One’s perspective certainly matters. If you are importing goods from Shanghai, this is undeniably, undoubtedly, good news. Your shipping costs just dropped by 15% year-over-year and if this downward trend continues, those costs seem likely to fall quite a bit further. Bad news or good news? Depends on your perspective, doesn’t it? Regardless of your perspective though, this is something that had to happen. Did anyone believe that the rise in shipping costs since COVID was permanent or sustainable? The rise in shipping costs had many causes and the drop back to pre-COVID levels will too. Weaker demand may well be one of those but it will hardly be the only one. And from the perspective of an investor – except those invested in shipping stocks maybe – this is good news. Lower costs will be positive for margins and will act to offset any drop in volumes. Will it be a perfect offset? Of course not and I can’t even say whether this is a net negative or net positive right now. Long term though, lower shipping costs are most certainly a positive for global commerce.”
These two charts and the corresponding PERSPECTIVE inspired me to look a little deeper into the New Zealand headlines mentioned above.
Lets start with house prices. The idea of “house prices now dropping rapidly” hits right at heart of Kiwi’s – Why? Because based on June 2021 statistics from StatsNZ “owner-occupied dwellings and other real estate accounted for 43% of total household assets” – a huge proportion (and likely bigger now), so it’s fair for the house price headline to set off an emotional response in many of us – So, how does the claim of a ‘rapid drop’ in house prices stack up?
Source: QV House Price Index, June 2022
Sure, average New Zealand house prices have pulled back around -5% since a peak in January 2022, but ‘dropping rapidly’? Really? With a 5 year view, we can see that since interest rate cuts and COVID induced stimulus hit markets, the average NZ house price rallied a massive +42%, in just two years! With the -5% pull back year to date, the average house price is still up nearly +20% per year, over the past two years – That means the average owner occupier is still far ‘richer’ than they were pre-pandemic – While any ‘loss’ hurts, I would argue that +20% year-on-year growth in NZ house prices was never reasonable, sustainable, or even healthy for society.
Similar to the shipping cost data presented by Joe, with some PERSPECTIVE, the chart above definitely does not scream ‘rapidly dropping’ house prices to me – that doesn’t mean they can’t, or wont, but they aren’t yet.
With inflation surging, and global debt reaching new highs, news outlets are making more noise about reserve banks and where they are setting interest rates – While the interest rate hike headline above may not be sensationalised, it does point to the fact that higher interest rates, and therefore higher mortgage rates, are ‘universally expected’ – But how do those universally higher interest rates stack up?
While yes, we have said goodbye to the super low mortgage rates of 3% during 2020/21, the above chart looks more like a ‘normalisation’ of interest rates from historic lows to me – Unfortunately taking a dose of PERSPECTIVE, and talking of ‘interest rate normalisation’ is not great news or click bait.
The next two headlines I highlighted, hit straight at our wallets and how the cost of living is hurting retailers and driving Kiwi’s away from NZ. From our little bubble in the Pacific it is easy to fall into the trap of thinking ‘the grass is always greener on the other side’. As a Kiwi who has recently moved back from Hong Kong where a single pint of beer can set you back as much as $35 NZD, I can attest to the grass not always being greener, but can we sprinkle a little perspective here also? Yes we can. You know the cost of living is a hot topic worldwide when the Visual Capitalist just published a visualisation depicting the relative affordability of cities all over the world. The below chart looks to New York as a baseline, being one of the most expensive places to live – Cities in blue are less affordable than New York, while cities in purple are relatively more affordable.
Where do NZ cities stack up? While we aren’t a highlighted on the chart, this data actually captures the relative affordability of 5 New Zealand cities.
Our cities do err on the side of being more affordable than New York (in relative terms, Auckland is actually on par!), New Zealand is clearly not a ‘cheap’ place to live. Naturally, I did compare how we stack up vs our antipodean cousins (Australia), and the sad truth is that while the cost of living in their cities is comparable, local purchasing power is much higher – Taking PERSPECTIVE may reduce the sensationalism of the above headline a little in this case. Kiwis aren’t worse off than your average New Yorker, but maybe we do need to hold out a little hope that the Amazon’s, Costco’s, Walmart’s, and Ikea’s of the world start to pay attention to our little island in the south pacific, and bring some economies of scale to our shores.
My final point this week is a little more of a direct hit – Can we take PERSPECTIVE around the current bear market that has evolved across global markets and hit all of our investment and KiwiSaver accounts? You guessed it, yes. In a great article, a few weeks back, Ben Carlson did a deep dive into the question ‘How Long Does it Take For Stocks to Bottom in a Bear Market?’ In his data driven approach, Ben looked into every Bear Market dating back to WWII (for US stocks as they have the best data), and found the average bear market lasts around 1 year, sees a -32.7% decline, and markets take nearly 2 years to bounce back and breakeven – the numbers:
Source: A Wealth of Common Sense
As with any average, some bear markets are longer, some are shorter, some are softer, and some are more violent.
The bad news is that this bear market could fall further, actually my base case expectation is that the path of least resistance (while inflation remains stubbornly high) is lower, but I could be wrong, and I do find it reassuring to look at the above and know bear markets do come to an end, even if you don’t know when the end will be.
The good news is that, there are a wide array of economic data series returning to their pre-COVID trends. It is possible that in doing so, some of these will overshoot and produce a more negative outcome. But in many cases, these reversions are exactly what we need to have a more healthy economy. It isn’t healthy for demand to be stoked to a degree that it outstrips supply and raises prices for everyone. It isn’t healthy for house prices to keep rising at +20% per year. Will returning to pre-COVID trends produce a contraction in real GDP that will be called a recession? Maybe. But assuming that the outcome is some kind of 2008-style financial crisis is assuming a lot – It is a fund managers role to manage your risk around that possibility, we would rather direct your attention to the things we can help you control, namely:
- Your Investment Strategy – Your allocation to growth assets, defensive assets, and diversifiers.
- Your Cashflow management – Your contributions, withdrawals or cash buffer.
- Your Response – This might mean stopping looking, deleting the app, focusing on living your life, eating well, exercising, and getting enough sleep at night.
That last point might sound trite, but Jason Zweig author of Your Money & Your Brain highlights that losses and gains can have profound physical effects on both the body and the brain. Financial losses are processed in the same area of the brain that responds to mortal danger, and that is why taking PERSPECTIVE really matters.
We may be advisers, but we are also investors, invested alongside you, and are here to help – Please feel free to book a time with any of us to discuss your situation, strategy, or PERSPECTIVE.