Sharemarket weakness and uncertainty weigh on confidence
Confidence amongst Kiwi investors has fallen to the lowest levels in more than two years, as global sharemarket volatility over the fourth quarter, uncertainty around house prices, lending restrictions, rental property tax changes, and foreign ownership law changes all take a toll.
The latest ASB Investor Confidence Report showed nett investor confidence, the difference between those who thought return on investment would improve in the year ahead and those who thought it would get worse, had fallen by 9% points from +19% to +10% in the three months to December.
"I think it would be impossible for confidence to do anything but fall when we think about all the changes and uncertainties we had to deal with late last year," ASB senior wealth economist Chris Tennent-Brown said.
"Sharemarkets both here and in the US peaked in September, but since then we've had a solid three months of negative news, and that’s showed up everywhere from the world’s sharemarkets declining through to KiwiSaver balances."
Some respondents have become more pessimistic about the future return on their investments. Some 25% expected returns from their investments in the next 12 months to increase compared with 29% last quarter, and 39% expect returns to stay the same compared to 42%, while 15% thought it would decrease, up from 10% in the third quarter.
"Unfortunately, people are not always great at extrapolating forecasts from what they observe going on around them. When investments are going up, we can be lulled into thinking the good times can last forever, and when they dip, we often can’t see anything apart from doom and gloom. So people often see returns from a recent period of time as an indicator for the immediate future," Tennent-Brown said
"There are some really significant changes to the investment landscape taking place at the moment, particularly in relation to investment property. Tax changes and foreign investment rules can have a major impact, and investors should consider professional advice to understand how these changes may impact them. The Tax Working Group’s findings are another source of uncertainty, although ultimately there is a long way to go from the report to new laws, including an election in 2020."
In contrast, for sharemarket investors it's a case of dealing with volatility, rather than changing rules and laws, that has likely been denting confidence. Sharemarket corrections are never easy to endure, but happen every few years and are an ever-present risk for long-term investors. Investors who have been in KiwiSaver since its inception in 2007 have already endured several periods of market volatility, similar to last year, and the Global Financial Crisis itself, when other investments dropped by far more than we saw in the fourth quarter of last year.
Personal homes continued to be viewed positively with a record 24% of respondents viewing their own homes as the best investment for good returns, up from 23% in the third quarter. This was followed by rental properties with 14%, according to the report.
"Confidence in rental properties was similar to personal homes a few years ago, but has been sliding since 2017. Changing sentiment is particularly noticeable in Auckland. Confidence in property has taken a hit over recent years in the city, particularly rental property," Tennent-Brown said.
In saying that, Aucklanders’ perception of their own homes providing the best return on investment still stands at 22%, with rental property at 17%. Both these numbers were 10% higher a few years ago, and between 2015 and 2016 nearly 50% of all investors thought that either rental property or personal property would provide the best investment return.
After briefly being viewed as the best bank product for return on investment last quarter, KiwiSaver slipped back to 10%, with term deposits again viewed as the best investment for returns (at 13%).
"The short-term returns have a big impact on expectations" Tennent-Brown said. "It was a negative quarter for investors with exposure to growth assets, but we continue to expect the growth-oriented investments within KiwiSaver and managed funds to perform better than term deposits over the long term," Tennent-Brown said.
"When markets are volatile, it’s not always a great time to change well-planned investment strategies. We've seen evidence of this in January, when sharemarkets have bounced back quite strongly."
ASB reports covering a range of commentary can be accessed at our ASB Economic Insights page: