INSIGHTS

PROTECTING YOUR INVESTMENTS FROM THE DAIRY DOWNTURN

Mark Lister, 2 April 2016

There's a lot of talk at the moment about the dairy sector and just how much of a bite the slowdown will take out of the economy. Given this conjecture, it’s no surprise some people are scratching their heads when they see our share market hitting records and optimism still quite high in some quarters.

The answer, of course, is that while dairy gets a lot of the attention, our economy is much more diverse than that these days. There are many sectors and industries still doing very well. Tourism and construction are the obvious ones, but even other parts of the agricultural spectrum are bright spots.

While dairy farmers short-term fortunes are languishing, companies like Scales (apples), Delegat (wine) and Comvita (honey and health products) are trading at record high share prices for a reason.

That’s not to say the worries over the dairy sector are unfounded. If the current weakness persists for too long, the effects will ripple much more widely than just to those directly involved in the industry.

Some of the investors I meet are getting increasingly worried about these risks, and the solution is quite simple. If it’s keeping you up at night, move some of your money outside of New Zealand.

For many of us, our businesses and houses are in New Zealand, while our wages and salaries are dependent on the prosperity of the domestic economy. Our eggs are largely in the one basket already, before we’ve even started investing.

We’re forever trying to get our clients to take a more global view. Some are more receptive than others, usually the younger ones, but generally there is still a huge aversion to stepping outside these shores.

I can understand that. There’s a long list of reasons to stay close to home. Familiarity with what we know, no need to worry about currency movements, and less paperwork at tax return time are a few.

Lower dividend yields are another big one. When you’re blessed with so many high-quality income shares as New Zealand is, people are hard to please.

The fact that our market has been such a lucrative hunting ground is also a factor. Local shares have returned about 15 per cent per annum over the last five years, which is outstanding.

We also tend to hold up better than most during rough periods, like at the beginning of this year. At one point US shares had fallen 14 per cent and European shares were 25 per cent down, yet the New Zealand market was down just 6 per cent at its worst point.

Despite all the excuses, there is an equally long list of reasons why we should be investing at least some of our savings internationally. Getting exposure to industries we don’t have or taking advantage of a strong currency are a couple of these, but reducing risk is another important one.

In smaller economies like ours, things tend to be more dependent on each other, so if one of our major sectors tanks, there’s a greater chance you’ll see pressure come on other industries. This inevitably leads to pressure on company profits, consumers, as well as house and share prices.

It wouldn’t take too much to knock a small economy such as ours, and having some of your savings invested elsewhere makes for a good insurance policy.