It was the day before the Brexit vote, June 2016. I was sitting at a trading desk in Europe. I turned to my colleague Raj and asked him where he thought it was going to go. Raj, over the course of his career, had worked with a number of high net-worth investors. He also had a good handle on the feeling on the streets up and down the UK. His answer came as a complete surprise.
‘I think they’re going to vote to leave,’ he said. ‘Older people especially are going to come out in force, and they don’t want uncontrolled immigration with the EU anymore.’
Most finance people thought and had priced in that the UK was going to remain in the EU. All the major betting shops also had significant odds against leaving. William Hill was 5/1 against leaving; Ladbrokes 6/1; and others more. In other words, for every £1 you’d bet on leaving, you’d have made a good £5-£6!
As the shock result for leaving unfolded, the pound immediately fell to a 31-year low, and the FTSE dropped 8%.
Profiting from market events
As a stock investor, many of my favourite British companies were on sale! These were well-run, profitable mid to large caps. They were supported by solid asset bases in sectors with upsides like infrastructure. In many cases, they were now delivering yields over 6%. They turned out to be profitable buys, contributing to a 16%+ return that year on my portfolio.
Had I been able to see the direction as clearly as Raj had, things could have been even more profitable. I was caught by surprise, with money-making opportunities falling from the sky, but with too small a bucket at the ready.
And that’s the question I’m asking now. Where are the markets going in 2019? What trends can you take advantage of to grow your wealth and yield income? It only takes one major unexpected shock like Brexit to catapult or plunge values in shares, property and currency markets.
Brexit was actually predicted, but nobody took any notice!
Raj wasn’t the only person who had predicted Brexit. Subsequent analysis of the High Street betting odds in the UK show that although the quantum of money bet was heavily against Leave, if you drilled down to the actual number of individual bets, there were more bets for Leave — a lot more.
So heavy-hitting finance types and the media in London put their big bucks on Remain. Meanwhile the little guys up and down the country ran a fiver on Leave, and then headed down to the polling station to vote.
If there’s one lesson I take from this experience, it’s that the wisdom of crowds trumps the wisdom of the mainstream thought leaders in finance, investment and in government.
That’s why we’re meant to be shocked by Brexit, the rise of Trump, and even here in NZ, bemused by a Labour-NZ First Coalition.
The simple truth is that the next generation in most Western countries is much worse off than their parents at the same age. Millennials (under the age of 40) are 40% poorer than Gen-Xers or baby boomers were at the same stage of their lives. Parents and grandparents are worried. Young people are frustrated. Many millennials I know struggle with student debt and can only enter the housing market — particularly in Auckland — with parental help or through some very lateral thinking.
While our best-educated generation ever was busy studying and borrowing on their brain, the value of key assets like stocks and property literally took off. In most cases, millennials didn’t have any of these rocketing assets. Yet they came out of study to find a more fragmented, competitive and globalised job market.
So, in the West, we worry about our future, particularly for younger people trying to secure a house and get ahead. In stark contrast, if you visit the developing world, you’ll find younger people excited about new opportunities as their economies grow rapidly and connect to global supply chains.
Some time ago, we let our productive base move offshore, surreptitiously lured by cheap goods. Now we’re left with ‘service-focused economies’ (read: less stable job markets) and too easy debt. But that’s another story.
As investors, you and I simply need to understand how and where to invest.
If you want to profit in the markets, you have to own the instruments — the productive assets.
Let’s look at some of the key trends set to impact on asset prices in 2019. [openx slug=inpost]
Property has traditionally been the way most New Zealanders make their money. I recently asked a partner in a larger accounting firm who specialises in higher net-worth people where most of his clients made their money. He told me, in a few cases, they were high-earning medical specialists. But, mostly, his clients made their money by investing in or developing property.
Yet, looking at property right now, unless you got in several years ago, the drivers in 2019 are entirely different.
For a start, Auckland housing is now running at 10 times the median household income.
That tells me that unless you’re bringing in offshore money (foreign buyer or migrant), or you are already invested in the market, or you are already an exceptionally high-earning professional, you can’t afford an Auckland home.
Foreign buyers have now been effectively banned. Immigration is being deliberately slowed — or given a ‘breather’ as the government termed it. These are policies of the recent Labour-NZ First government that have not only helped it come to power but are supporting its acceptance.
More and more people I speak to don’t want National back. That’s because National is going to reverse the foreign-buyer ban and risk escalating the generational housing war again.
Meanwhile, within the market itself, we’re slowly starting to see baby boomers with empty nests sell their larger, maintenance-intensive homes. They will downsize or move to retirement villages.
In Devonport, a significant feature of my view is now the cranes building the new Ryman village, which will comprise 192 units.
Ryman CEO Gordon MacLeod has said of the wider trend:
‘Over the next four years we will free up 2,500–3,000 homes in the Auckland area as people move into the 2,500–3,000 units and apartments in our villages.’
As of November 2018, house prices in Devonport showed a 13% year-on-year decline.
Housing for investment has, of course, been a significant part of the market. However, yields are now well below even those of anaemic term deposits. The estimation of these yields usually fails to correctly account for maintenance costs, periods of vacancy, or the time and stress involved in managing a rental.
The Kiwi love affair with investment property is also well out of favour with the government. Regarding the end of ring-fencing rental losses, the IRD publication begins with the raison d’être:
‘The Government has committed to a number of policy measures aimed at making the tax system fairer and improving housing affordability for owner-occupiers by reducing demand from speculators and investors.’
Property investors not only face tough yield and tough market conditions. The regulatory trend now is to build a higher wall in order to respond to housing affordability fears that have been at fever pitch.
Interest rates look set to remain pretty flat for a long time yet — at least if you pay heed to Reserve Bank pronouncements. Factoring in real inflation and taxation, there’s nothing to be gained here except liquidity.
More people are now living off unearned income than probably at any other time in human history. So the stock market faces steady and growing demand for investment in productive and reliable businesses. This is particularly true of those that offer good assets, sector growth, and growing customer bases.
This level of activity in the markets and the increasingly volatile global trading conditions will create opportunity. Brexit was one such opportunity.
As I contribute to Money Morning NZ, I’m going to be looking at the key trends I see in stocks and shares. I believe that the best thing anyone can do to grow and preserve their wealth is to invest in productive and growing business assets. But you have to get the businesses right, as well as the sectors and trends in which they exist.
And you need to know what ordinary people want, need and buy — rather than listening to the mainstream media and the finance thought leaders who bet 6/1 against the people’s choice in the UK!
I look forward to connecting you more with the key market trends in 2019 and how you can profit from them.
Analyst, Money Morning New Zealand