Mark Lister, 1 January 2017

I think investors should take the Kane Williamson approach this year.

Like the Black Caps captain, stay defensive and play most things with a straight bat, quietly accumulate returns, and pick off decent opportunities when you see them.

Most of all, remain disciplined and don’t lose your cool when the unexpected occurs, which it will.

This year is likely to be a tougher one, with lower returns, higher risks and more volatility.

The NZX50 has more than doubled in the last five years, returning an annual average of 16.1 per cent. That’s a golden run, well above the 9.1 per cent average since the index came into being.

The gross dividend yield on NZ shares is 5.8 per cent, so I would be counting on getting about that, plus maybe a few per cent to account for steady earnings growth from most companies.

Returns closer to the long-term average are the order of the day, not the double-digit rises we’ve enjoyed for the last few years.

The same goes for property.

The gains of the last few years have been phenomenal, but are completely unsustainable.

In the last fifty years house, prices have risen by 2.8 per cent more than the inflation rate each year, on average.

Holding a little more cash than usual is sensible, especially when there are so many risks out there. Growing political tensions, rising interest rates, debt levels that are worse than before the GFC, and everything looking expensive, just to name a few.

However, this doesn’t necessarily mean sitting on the sidelines and doing nothing.

Being completely out of the market can be just as risky as being all in. There are still opportunities for investors, and many high quality companies will continue to deliver.

An inflationary rebound could be a big theme in 2017, and we’re seeing the signs of this already in places.

The tight US labour market might soon push wages up, which inevitably will flow through to broader price rises. Manufacturing prices in China have started to rise for the first time in five years, while oil prices are 50 per cent higher than a year ago.

“The impact of a big rebound in the dairy payout cannot be underestimated, and this will benefit many provincial regions.”

Interest rates will probably keep going up on the back of this, and while they might not reach the highs from several years ago, they’ll certainly be well above last years lows.

This means investors need to strike a balance between staying defensive and keeping a healthy exposure to growth assets. I’d put my money on lower yield, higher growth companies performing better this year.

The local economy is in good shape heading into 2017.

Migration, construction and tourism are all supporting the economy, unemployment is below five per cent and business confidence remains well above historic averages. The impact of a big rebound in the dairy payout cannot be underestimated, and this will benefit many provincial regions.

However, the general election will almost certainly create some nervousness, an economic accident in China could see us stumble, or a sharper than expected rise in interest rates could hurt some overleveraged homeowners.

This might well be as good as it gets in terms of growth, so hedge your bets just in case a bit of a slowdown emerges. Amass a few more offshore assets while the currency is strong, particularly in US dollars, or at least add a few exporters to your portfolio.

This article was first published in The New Zealand Herald on 1 January 2017.