reserve bank of new zealand decision - impact on the market

Invast Insights

Week Commencing March 10, 2014

www.invast.com.au | 1800 468 278

This week we look at the following topics:

1.0 Reserve Bank of New Zealand decision

2.0 The magic formula to stock investing

3.0 Gold bulls vs. bears as price stabilises

4.0 How to trade the copper price


1.0 Reserve Bank of New Zealand decision

The Reserve Bank of New Zealand (RBNZ) raised its overnight cash rate from

2.5% to 2.75% last week. With inflation running well above the target band

range, it was a case of needing to raise rates in order to maintain legitimacy.

The biggest risk a central bank faces is that of lost legitimacy and credibility.

It’s always a catch 22 situation.


The NZD rallied hard following the announcement, which was being priced as

a 95% chance by traders surveyed ahead of the announcement. It doesn’t

come as a complete surprise but we think those hoping for future aggressive

monetary policy moves from the RBNZ in isolation of other developed

economies should think twice. We now have to look forward.

The RBNZ is expected GDP to grow by 3.3% in the year to March and states

that the growth in the economy is becoming more broad based. We don’t

dismiss this at all, but at Invast we think the rally in the NZD is significant and

perhaps dangerous, now almost near parity with Australia. This will start to

have a detrimental impact to New Zealand’s exports and increase Australia’s

competitiveness. The RBNZ stated “The high exchange rate remains a

headwind to the tradables sector. The Bank does not believe the current level of

the exchange rate is sustainable in the long run.” The market hasn’t budged at

all so it will be interesting to see how the RNBZ will manage the currency

headache in the coming months. Jawboning is a dangerous game, just ask

RBA Governor Glenn Stevens.


The RBNZ went on further to say “Prices for New Zealand’s export

commodities remain very high, and especially for dairy. Domestically, the

extended period of low interest rates and continued strong growth in

construction sector activity have supported recovery. A rapid increase in net

immigration over the past 18 months has also boosted housing and consumer

demand. Confidence is very high among consumers and businesses and hiring

and investment intentions continue to increase.”

International trade is a large part of New Zealand’s economic output,

accounting for around 24%. Most of this is also centred on agricultural

products which are sensitive to price movements. The diary industry is one of

the strongest pillars and the emergence of a huge middle class in China and

eventually India should support growth in demand for New Zealand’s

products, but there are other alternatives in the region – Australia for starters.

Tourism is also a reasonable large part of the economy, contributing around

10% of total output. So it’s obvious from these numbers that a higher

currency will start to chip away at the country’s competitiveness.


The Australian economy is still feeling the impact of tits currency’s rally above

parity over the past few years. Job losses from Toyota, Holden and Qantas

among many others are all compounded by the high cost of doing business.

These decisions don’t take place immediately and so there is a lagging effect.

The high NZD will start to have this lagging impact no doubt.

Perhaps the dairy industry in New Zealand is more resilient than the car or

aviation industry in Australia, but the point here is that the currency plays an

important part in determining the cost base of multinationals. The rebuilding

of Christchurch and other organic growth stories in New Zealand cannot be

completely ignored but neither can the huge appreciation in the currency.

Traders are likely to continue backing the NZD towards what we think will be

a breaking point for the currency. This might be at parity with the Australian

dollar. We don’t propose fighting the market for the time being, going short

the NZD will be a difficult trade in the short term but makes perfect sense – at

least against the AUD – over the medium term.


Below is a chart form Invast’s MT4 trading platform which shows the

depreciation of the AUD over the NZD.


In summary we could continue to see the AUDNZD fall in the short term

towards the A$/NZ$1.04912 range where it should find some support. If the

currency pairs remains below A$/NZ$ 1.06650 then it seems that the former

level will be in traders sights. Parity isn’t completely out of the question but

this will depend on data out of Australia. Make sure you check out

blog.invast.com.au on a daily basis to get our latest technical analysis and

short term trading insights.

2.0 The magic formula to stock investing

Investing can be really simple. Many in the market over complicate things.

Take analysts for example that spend all day long crunching numbers,

running them through their complex computer models and then publishing

reports over dozens of pages just to get to one conclusion – either a buy or a

sell. More often than not, these conclusions are wrong which makes the

whole exercise pointless. My experience in markets has taught me that the

best investments are usually the simplest. This is the most common piece

http://www.blog.invast.com.au/








of advice given to me by my mentors. My advice for many people over the

years is to invest in what you understand – if you don’t understand anything,

keep your money in the bank. That doesn’t mean that you should never

understand, it just means that you should learn what you are investing in

before handing over your money.

When it comes to investing in shares, there really is only one magic formula

and it’s much simpler than you think. It’s ok, you don’t need to take out your

calculator. It’s called studying the business strategy. Simple, right? Some might

be cynical but please let me explain why I think strategy is the most

important formula in evaluating a business.

The recent Reserve Bank of Australia (RBA) rate cut brings about some

important questions. I havebeen hearing the following question from clients

over the past few months. Should investors be aiming for dividend stocks

despite the huge rally in banking shares? Is Telstra (TLS) going to $6? Should

the focus be on growth opportunities from lower lending rates? Is franking


the swing factor? Should a premium be paid for certainty, which can

disappoint like the Coca-Cola Amatil (CCL) downgrade? Or are the miners that

are trading on big discount the way to go?

These are all very relevant questions and all very confusing from a portfolio

perspective. Let's stand back for a minute and think things through. The

answer I believe really depends on the underlying investment strategy. It all

sounds very formal, having a strategy around your investments, but it really is

the most important starting point to every investment process. Many

investors think they have a strategy, but if you ask them to define it in one

sentence, they will struggle. If you're reading this, ask this question of yourself.

The most common answer is something along the lines of: "I want a little bit

of income and capital growth. I also want to find a small-cap stock with huge

returns and not lose any money during the process.“

Basically, that's an "I want it all" approach, which we all know is not possible.


It's not just individual investors. Many companies also fail to define their

investment strategy. I met a company at an investment briefing this week,

which is looking at putting together an IPO (initial public offering) in the real-

estate space. After an hour-long presentation and various questions from the

analyst team, I realised the presentation slides did not contain a section or

even sentence on strategy. It's something that is often overlooked.

The very intelligent and experienced managing director managed to answer

the question when asked, but not having it in the presentation slides shows

how even the most intelligent investor in the market can often overlook the

most simplistic issues. So, what's the right investment strategy? That's

something that you will need to answer for yourself. It largely depends on

circumstances, motivations, risk tolerance, goals, and the pace at which you

want to achieve them. What I plan to do here is show you an example of how

strategy setting in portfolios plays an important part in success. You can look

at fund managers, or even better, find companies that have strategised

successfully over the years.


One of the best-performing stocks on the Australian market over a long

period of time has been Westfield Group (WDC). The company has changed

forms over the years, more so in recent history, but the focus on strategy is

something that is always front of management's mind when driving the

portfolio. It's a simple business - build and develop shopping centres, rent

them out and manage the operation.

But without a firm strategy, the business could have easily lost its way over

the years. Many property groups blew up during the crisis, particularly larger

ones in the US of comparable size. Yet Westfield managed to ride out the

downturn in good shape. The strategy is simple and summed up in one

sentence, which you will always find within the first few pages of a Westfield

presentation to the market: "To develop and own superior retail destinations in

major cities by integrating food, fashion, leisure and entertainment using

technology to better connect retailers with consumers."


The strategy changes over time. Food, for example, is now a main priority in

the development and management of centres. People have to eat - and

Westfield wants to feed them. Will Westfield develop in remote areas?

Probably not, since the strategy says the focus will be on major cities. Are they

afraid of online shopping? Probably not, since the strategy embraces

technology that connects retailers and consumers.

So, does having a well-thought-out strategy make Westfield a good

investment? Assets are geographically diversified: Australia 41 per cent, US 40

per cent, the UK 15 per cent and other locations the remaining amount. Please

note that the Westfield Retail Trust (WRT) is a different vehicle. Total assets

under management for Westfield Group are $64.4 billion. Group occupancy is

at 97.8 per cent, with comparable growth in net operating income of 3.3 per

cent. These numbers are as of the end of financial year 30 June 2013.

The brand has become iconic globally, perhaps similar to a Mercedes, Prada or

Louis Vuitton. We often complain that the Australian market lacks such global


consumer brands, but I would argue that we have the brand to house them all

in one location - shopping malls. We might not comprehend this in Australia

because we have become so used to walking through a Westfield mall, but

many developing economies around the world who seek to embrace Western

brands would acknowledge a Westfield mall as a sign of progress in their

economy.

Having Westfield flagship malls on Pitt Street in Sydney, at the World Trade

Centre site in New York and the Olympic site in London is no coincidence. It's

all part of the strategy. Does the gloss stack up financially? Return on

contributed equity is at 11.4 per cent - the return Westfield is earning on its

investments. It's not a great amount of money, but to me it means there is

scope for earnings growth. Remember, Westfield is not just an owner of malls,

it also develops and manages them. The development pipeline has been slow

in recent years, but that is a sign of prudence and patience. Westfield targets

12-15 per cent un-geared returns on its developments.


If Westfield's dividend grows at 5 per cent annually over the next decade, last

year's 51-cent distribution will become 84 cents a share. It's by no means

guaranteed, but it's also worth noting that Telstra paid a 27-cent dividend in

2003 and will pay 28 cents a share this year, so the growth has been much

less. The banks have seen a much larger rate of growth in their dividends over

the period, but for investors looking at diversifying outside of the banks,

Westfield on merit deserves a closer look.

I started off with a range of different questions and ended up with a simple

investment that we all know fairly well. Even if you don't like the Westfield

proposition or it doesn't fit into your strategy, it's hard to discredit their

successful execution of their own portfolio. We can learn a lot from them. They

have a well-thought-out plan, a track record spanning many decades, solid

and well-tenanted assets, reasonable earnings growth, a commitment to

dividends and prudence in spending money. Understanding a company’s

strategy is the most important first step to investing. Even if you have been

investing for decades, ask yourself this question – do you understand the

strategy of each stock you are currently holding right now?


We’ve recently welcomed a whole list of new clients to Invast which might

have not read our previous reports. For the new comers, we want to reiterate

some of the basics around our service. The same way of thinking articulated

above is put into practice monthly when we update our portfolios. There are

three portfolios which Invast clients receive free as part of our premium

content. Our model portfolios are aimed to give you an idea and framework

around managing your investments - they are general in natural and do not

take into consideration your personal circumstances so please keep that in

mind.

The portfolios are not benchmarked to any particular index, they are run with

an absolute return basis in mind. They will also evolve to include global

foreign exchange and index positions and so picking one stock index to

benchmark against is pointless. Common benchmarking to the ASX200 is

pointless since:

• The index is just a measure based on market capitalisation and doesn't


really mean much other than a mathematical calculation and 2: Most

individual investors do not have to be invested 100% of the time, unlike fund

managers and so the opportunity cost of investing is being in cash.

Without knowing personal circumstances, our general portfolios are set up to

reflect time horizon. If you are 20 years old and looking at growing your

wealth your portfolio should very different to somebody aged 64 and about

to enter into retirement. Most stock tipping sheets and research services will

tell you which stock to buy but they won't tell you how much and for how

long you need to hold that investment. Even the ones that provide model

portfolios, there isn't enough emphasis on time horizon. Is a balanced

portfolio suitable for the 20 year old just as much as the 64 year old?

In a perfect world we would balance time horizon with risk tolerance etc but

then the value of the portfolios will become too complicated. The portfolios

we update on a monthly basis will just drill down on what we think - on a

general basis - each age category should be looking at (buying/selling) from


time to time. For those 20 year olds that feel like growing up quickly, they

have the choice of adopting a shorter time frame approach and conversely for

the baby boomers looking at going into retirement, they can opt to be young

forever.

The three portfolios explained - We think most investors are in one of three

stages - wealth creation phase, wealth preservation phase and then

drawdown phase. A fully franked dividend is much more important later on in

life when income from salary becomes difficult than it is for somebody who

has a life and work expectancy of more than 40 years. Again, this is a general

statement only and individual circumstances will change. In our portfolios,

each category tries to capture:

Wealth Creation - Higher tolerance for risk, more exposure to forex and

commodity positions, greater appetite for growth and emerging

opportunities. Taking large losses is tolerable although focus is on very tight

risk mitigation methods like stop losses. Return target above 10% pa.


Portfolio commences with $50,000.

Wealth Preservation - We have made the money and looking at smart ways to

invest it. Quality is key, income is important but not as important as certainty.

We have some tolerance for the riskier things in life but not too much as

retirement is the next phase of our life. Return target between 5-10% pa.

Portfolio commences with $50,000.

Drawdown Phase - We have created our wealth, preserved it well and now

need to find ways to generate a reliable income because we are no longer

work and need to make sure we have enough money to pay the bills as they

fall due. Return target around 5% excluding franking credits pa. Portfolio

commences with $50,000.


3.0 Gold bulls vs. bears as price stabilises

We were recently asked by a client to state both the fundamental bull and

base case scenarios for the gold price over the coming few years. We thought

it would be interesting to share these with you this week. We will update our

gold chart levels next week – it seems as though gold is forming some solid

support from its recent lows. Clients should note that we update our view on

major market movements daily via blog.invast.com.au and hold a weekly live

market analysis session where you can ask questions, to register to this week’s

session click here.

Bulls say: Inflation is set to rise globally from historically low levels and gold is

seen as a major inflation hedge against traditional paper currencies. The

world can print an infinite amount of money but the amount of physical gold

is only becoming harder and harder to mine which means its relative value is

only set to keep rising. As governments fuel more money into the global

financial system, the next major collapse could be only around the corner








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which means that gold will once again become the preferred safe heaven

sending its price to new all-time highs.

Bears say: The world is experiencing lower growth which means price rises are

not likely to be seen like the past few decades and with deleveraging,

deflation is the largest threat to the financial system. This means gold will

continue to lose favour and traditional income producing assets, like currency,

will remain in favour. Gold carries with it inconvenient carrying costs like

storage etc. It has little utility other than a store of value – you cannot eat

gold or use it to produce much other than jewellery.

4.0 How to trade the copper price

The recent slump in copper price has been driven by much weaker than

expected Chinese data. We have previously made the case that at the time

being, China is still the key marginal consumer of copper and worse than

expected economic data – while still positive in absolute terms – has put


pressure on the industrial commodity. We remain fairly positive on the

medium term outlook for copper, we think that China and India are still in the

early stages of their full consumption of copper and supply continues to

struggle. Copper stock piles at the London Metals Exchange have come off

their five year historic high levels and currently trading at around the 265,000

tonnes which compares to the high of 680,000 experienced in May last year.

Click here to see the full copper stockpile and private analysis via Kitco Metals

website.

While our fundamental view is positive, we think short term technical levels

should not be ignored either. We are of the view that copper will find a base

of support at around US$3/lb – many large producers like Oz Minerals (OZL)

in Australia are producing at around or above this level and so a sustained

copper price around here will see many smaller and less economic mines go

out of business, adding more pressure to global supply. Copper needs to rise

at around US$3.60/lb for the producers to start generating a reasonable

return on their capital.

http://www.kitcometals.com/charts/copper_historical_large.html#lmestocks_5years




The following chart shows the copper price via our Invast MT4 trading

platform. We currently see the following short term technical levels playing

out over the next few weeks – support levels at US$2.9075/lb and then at

US$2.8645/lb with resistance from here at US$3.00/lb and at around the

US$3.10/lb. We think the price has bottomed and a long position with a stop

loss at the above mentioned support levels could generate a profitable

position over the next few months. Please note that patience is needed and

stop losses should be put into place.


Visit our website to learn more about Meta Trader 4 and its use.

http://www.invast.com.au/platforms/metatrader-4.aspx




7.0 Disclaimer

Please note that you are receiving this report complimentary from Invast Financial Services Pty Ltd (AFSL 438 283). Invast staff members may from time to time purchase securities which are included in this or future reports. The authors of this report may or may not be holding a position in the securities mentioned. Please note that the information contained in this report and Invast's website is of a general nature only, and does not take into account your personal circumstances, financial situation or needs. You are strongly recommended to seek professional advice before opening an account with us.

General Disclaimer: This newsletter contains confidential information and is intended only for the person who downloaded it. You should not disseminate, distribute or copy this newsletter. Invast does not accept liability for any errors or omissions in the contents of this newsletter which arise as a result of downloading this newsletter. This newsletter is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any financial product. Invast Financial Services Pty Ltd is regulated by ASIC (AFSL 438 283 | ABN 48 162 400 035).


Risk Warning: It's important for you to read and consider the relevant Product

Disclosure Statement, and any other relevant Invast Financial Services Pty Ltd

documents before you decide whether or not to acquire any financial

products listed in this email. Our Financial Services Guide contains details of

our fees and charges. All these documents are available here on our website,

or you can call us on +612 8036 7555. CFDs and Foreign Exchange are

leveraged products and carry a high level of risk and you can lose more than

your initial deposit so you should ensure CFD and Foreign Exchange trading

meets your personal circumstances.

General Advice Warning: Being general advice, this newsletter does not take

account of your objectives, financial situation or needs. Before acting on this

general advice you should therefore consider the appropriateness of the

advice having regard to your situation. We recommend you obtain financial,

legal and taxation advice before making any financial investment decision.

*Distributed with the permission of Invast.com.au

reserve bank of new zealand decision - impact on the market

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