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Crumbly Dollar

By Simon Angelo

Words can change the game.

They had a problem with locker thieves when I was at school. One got caught. The headmaster came on stage next morning, black cape waving behind him.

'Boys, we have a thief in our midst. And as I warned you, I'm going to name him...'

The locker problem ended forthwith.

Well, there's been some other words floating about that have changed one of the most fundamental dynamics in this economy.

Old school learning on the power of words. Photo source: NPBHS.

For those clients who've been wondering why there's been a slowdown in new share buying this month, there's one reason.

The New Zealand dollar has weakened far more than we're used to. Last year it was stronger. And we were able to buy forex to plough into the best global equity assets. They've gone on to deliver well.

Some have funds in Europe and elsewhere. These can be deposited directly into your brokerage account. And we can buy directly in the global markets, where there remains strong opportunity.

Why has the Kiwi gone soft?

Just like the locker room warning, the Reserve Bank Governor mentioned a potential OCR cut.

You don't cut the OCR unless you see weak, soggy economic ground ahead.

Now, this action looks even more likely. Just released are lower rates of labour market participation and weak real wage growth.

What happened to the 'rock star economy'?

New Zealand can't have its cake and eat it too. As I've mentioned in market commentary, much of what we export is lower margin - dairy (26.5% of GDP), meat (13.5%) and wood (9.4%). In the past the National government ran very high rates of migration (per capita), left property for sale on the global market and experienced a flood of insurance money to rebuild post-quake Christchurch. The new government is turning against that, keeping its support base happy and depressurizing house prices.

The economic dynamic is changing fast. Forex traders usually have the best handle on this trend. And they've been selling off the Kiwi.

Tide about to turn

Some analysts seem to think NZD is now in oversold territory. We could see it gain ground this month, especially if the US and China find common ground on that elusive Trump - Xi trade agreement.

The Kiwi is tied to China's fortunes as our biggest export market. And our dollar is one of the globe's more risky currencies - so it's not so widely traded unless there's clear upside or downside.

For the time being we're focusing on Australasian and some European stocks - where the currency swap is still reasonable. And we're waiting for the Kiwi to strengthen - which could happen dramatically if the mentioned OCR cut gets staved off.

Patience is important. You make money in this business when you buy. Yet opportunities can also come fast.

Performance update & strategy

This long-term buy and hold market we find ourselves in is pleasant. Like a long, sunny beach. There's tail wind behind many stocks but enough volatility to still find value. Especially when you take a contrarian view and aren't confined to a larger fund situation.

April 2019 showed growth of 2.84% for the month across the composite portfolio (total aggregate, weighted return across all portfolios following the strategy). This brings performance since the start of this year to 15.93%. Average annualized performance since 2014 (after management fee) now shows 20.44%.*

This has been achieved without taking excess risk. The standard deviation of monthly returns sits at 2.58% and our Sharpe ratio at 6.77.

Please see our performance chart for more details.

Stock take

AGL - the contrararian's pick. Photo source: rallysportmag.com

The mainstream broker rating on AGL Energy [ASX:AGL] has been 'hold'. We dissented and started buying it around $18. It's been up to $23 since. While we wait for further growth there's a juicy dividend yield of around 6% rolling in.

It's likely going to be a long term investment to realise the full potential. Especially since the market has already been made aware of headwinds with renewable energy prices and partial re-regulation of retail electricity prices. However, the Australian population is growing and EV projections alone predict increased demands for energy - especially from renewable sources.

AGL is the largest renewable energies investor listed on the ASX.

The month ahead

May will be an interesting month. I notice tonight on the trading desk, plenty of green. Meaning stocks continue to move ahead.

The developed world is addicted to cheap money with central bank rates repressed. This fuels the global hunt for yield. And it's hard to see that changing anytime soon with aging populations forming a significant demographic trend.

Here in New Zealand, the yield hunt seems even more pronounced. Property investors have gone shy. Government attention is sucking the wind out of the Auckland property market. Fair enough - rental houses aren't ideally productive investments. But against this, the NZX-50 index has burst through the milestone 10,000 mark!

As for the high school locker thief? I don't remember his name. But I do remember that words can change a school. And make a market.

Regards,
Simon Angelo
CEO, Vistafolio

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*Past performance is not an indicator for future performance. Your actual portfolio will differ from the composite portfolio mentioned. Annualized returns are after management fees and after withholding taxes. The information contained in this document does not constitute an offer to sell or a solicitation to buy an investment, nor should it be construed as investment advice. Vistafolio investment services are available to Eligible Investors and Wholesale Investors (not to Retail Investors) as defined in the Financial Markets Conduct Act (2013).