July 2016

Creating, Managing & Protecting Your Wealth


July 2016

In this edition we look at the share markets post Brexit, where inflation and interest rates are headed, and the case for taking Level Term insurance (your premiums can be guaranteed not to increase each year with your age).

Share Markets Post Brexit

After the surprise decision by the UK to exit the EU world equity markets dropped by $2 trillion USD. This is a large number and cannot be reconciled with the direct economic impact of the UK to leave the EU. The GDP of the UK was $2.9 trillion USD in 2014 and the GDP of the UK only makes up 2.4% of the world's economy.

Not surprisingly, once the dust settled (less than 10 days later) markets returned to pre-Brexit levels and market volatility has decreased.

The IMF's (International Monetary Fund) forecast for world GDP growth in April was revised down from 3.5% to 3.2% picking up in 2017 to 3.5%. While it is acknowledged that world growth rates are sluggish and the world economy is more exposed to risks there are still pockets of opportunity.

Data out last week shows the US labour market bouncing back with broad-based jobs growth in June, alleviating concerns of an economic slowdown in the United States.  Non-farm payroll employment rose 287,000 in June following virtually no growth (a revised increase of 11,000) in May.

Inflation and Interest Rates

The NZ Reserve Bank has in the past used interest rates to control inflation within the target band of 1% to 3%. Some inflation is good as it stimulates the economy. The problem around the world (including NZ) is that inflation is at record low levels (NZ 0.4%) and interest rates are also at low levels. Some countries even have negative interest rates, for example the Swiss National Bank interest rate is currently negative 0.75%.  Your account will be debited by 0.75% p.a. for the security of having your money safely secured by the bank.

In early July the international rating agency Standard & Poors (S&P) revised the outlook on the Australian Sovereign Credit rating (AAA) to a negative credit watch (the rating hasn't been changed but they are watching to see if it needs to be downgraded) which will impact the credit ratings for Australian banks and the cost of finance. This will also impact Australian bank subsidiaries in NZ (NZ banks that are owned by Australian banks) with an expected rating downgrade from AA- to A+.

What does this mean for New Zealand interest rates?

The next NZ Reserve Bank Monetary Policy Statement (MPS) and Official Cash Rate (OCR) review are on 11th August. The last reviews in April and June resulted in no change to the OCR. The OCR impacts the mortgage interest rates charged by banks.

Low interest rates are one of the key factors fueling the Auckland property market, the other factors are greed, a shortage of properties and immigration. With the impending downgrade of Australasian banks the NZ Reserve Bank has some room to drop interest rates to stimulate the economy without fueling the property market. Banks may need to raise interest rates because of their increased cost of borrowing.

The announcement on Monday that the annual inflation rate came in at 0.4% was below the NZ Reserve Bank's expectation of 0.6%. The markets are now factoring in a 80% chance of a further rate drop to an OCR of 2.0%.

We have a contrarian view,  In our opinion its more likely the NZ Reserve Bank will hold rates at the current OCR level of 2.25%.

We need to come to terms that inflation and interest rates will remain low for a long time.

If you have a floating mortgage its our view that you should fix the interest rate now as we believe we are at the bottom of the interest rate cycle. Alternatively wait until the official OCR rate is announced on the 11th August. Even if the OCR rate drops to 2.0% this does not mean banks will lower their mortgage rates this time.

Level Term Insurance

Insurance premiums usually increase each year because as you get older the chances of something happening to you (suffering a catastrophic event) increases. Some clients cancel their insurance when they get older, when they need it the most, because the premiums keep increasing.

Level term insurance is where the premiums you pay each month do not increase with age. Initially premiums are higher than yearly renewable insurance, but over time the total cost you pay is less.
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Lyford Financial Services
174 Hutt Road, Petone, Lower Hutt 5012
T: 04 471 0662               W:
Alison Renfrew FSP35961 and Richard Renfrew FSP35821 are authorised financial advisers (AFA) and registered to give financial services advice including investments. They are directors of Lyford Financial Services Ltd and Lyford Investment Management Ltd trading as LYFORDS. The information in this newsletter is given in good faith and has been prepared from published information and other sources believed to be reliable, accurate and complete at the time of preparation but its accuracy and completeness is not guaranteed. Information and any analysis, opinions or views contained herein reflect a judgment at the date of publication and are subject to change without notice. To the extent that any such information, analysis, opinions or views constitute advice, they do not take into account any person's particular financial situation or goals and, accordingly, does not constitute personalised advice under the Financial Advisers Act 2008, nor does it constitute advice of a legal, tax, accounting or other nature to any persons.
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