At the outset, it is important to remind ourselves that investment markets always tend to provide unexpected surprises and 2007 should prove no different in this regard. Accordingly investors' primary focus should be on building a diversified portfolio, that matches their specific investment objectives or risk profile.
Strong investment returns for the past four years and declining global growth suggest an uncertain investment outlook for 2007. While this might translate into temporary periods of volatility or market pullbacks, our assessment is that investment returns will remain positive for 2007, though lower than 2006.
Briefly, for the major asset classes our views are:
Global shares should provide good returns. Valuations remain reasonable, profit growth should be okay and there are still plenty of global savings looking to be invested. Asian shares (outside of Japan) are likely to be the outperformers due to better valuations and prospects for growth in those economies. In the major markets, US shares are likely to perform well as US interest rates fall, beating returns on European and Japanese shares.
Over 2007, the New Zealand dollar is likely to fall from its current overvalued levels. Investors can capture the benefit of any fall in the dollar through investing in foreign assets, such as global shares. Prior to doing so it is important to check the hedging policy or strategy of any fund, as some global investment vehicles are hedged back to New Zealand dollars. The short-term plight of the currency remains difficult to predict. It will potentially remain supported by New Zealand's high interest rates, particularly while the threat of a further interest rate increases remains.
New Zealand shares are likely to provide lower returns than global shares, as subdued economic growth relative to global growth offers less potential for profit growth. However, returns are still likely to be favorable, given the market is not overvalued and easy global liquidity is likely to fund further merger and acquisition activity.
The new investment tax regime will make it more attractive to invest in actively managed New Zealand and global share portfolios, which aim to outperform the index. From 1 October 2007, actively managed New Zealand share funds that qualify as portfolio investment entities will no longer pay tax on capital gains. Therefore if you hold New Zealand shares directly, you should start thinking about investing in a managed fund. This should also increase investor demand for New Zealand shares, further supporting the market.
Fixed interest securities (bonds) are likely to provide relatively poor returns, both globally and in New Zealand. This mainly reflects their low running yield and little prospect for capital gains. Cash and short term deposit returns remain attractive relative to investing in longer term fixed interest securities.
Unlisted non-residential property should have a particularly strong year as investor demand continues to push property yields down or conversely the price of properties up. Underlying supply/demand fundamentals also remain favorable.
Furthermore, the new tax regime provides an unexpected boost to the New Zealand property sector. Under the new regime, after-tax returns to investors in various property funds have the potential to be considerably greater, which in turn creates greater investment demand for assets. Evidence of this has been seen in the recent sharp rise in the prices of listed property shares, which we believe will translate into the price of unlisted property funds. AMP Capital Investors expects this environment to provide a strong boost for our property funds during 2007.
In conclusion, while investors can expect periods of volatility and market pullbacks in 2007, they can also expect another year of good investment returns. Particular areas of opportunity for 2007 include the New Zealand property sector (non-residential assets), global shares, and foreign currency.
Anthony Edmonds
Head of Sales & Marketing
AMP Capital Investors