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In this investment update, we show the monthly pattern of returns over 2010, then focus on the New Zealand Pool returns and the movement in the NZ exchange rate.

Positive returns are often negative

2010 was a year where each sector produced a positive return after tax and fees but was a year of contrasts. With the exception of cash that was positive each month, it was not smooth sailing for each sector. Over the year some shares (NZ and overseas currency hedged) did better than bonds, which did better than cash, but other shares (e.g. overseas shares unhedged) did not do as well as cash. The difference was the impact of currency. While the share Pools were positive overall, many were negative half the time. This reinforces the important principle that the portion of your savings that you intend to spend over the immediate future should be in “cash”. We never know when bonds or shares will have a negative month or negative year.

The table below shows the pattern of positive and negative returns each month over the year (after 30% tax to 30 September and 28% thereafter).

The NZ sectors – sometimes shares do outperform cash and bonds!

SuperLife has three NZ focused pools; cash, NZ bonds and NZ shares. The after-tax returns of these over 2010 were:

Of the returns over 2010, the outcomes for NZ bonds and NZ shares were above the average that would normally be expected over the long-term (20 years +) and cash was below that expected. Over the last 7 years, cash was slightly above what we expect long-term and NZ bonds and NZ shares below expected.

While NZ shares had the higher return in 2010 of the three sectors, it also had the most individual months that were negative. Four of the 12 months were negative – this was about normal. The cash pool was the only pool where there were 12 months of positive returns.

The fact that NZ shares over this period has outperformed both cash and bonds but had the most negative months, illustrates the important principle that if you invest in shares, it should be for the long-term and with money you do not plan on spending short-term. It also means that if the sharemarkets go down, you should stick to the strategy and be patient for the recovery.

Exchange rate

A key challenge in 2010 was managing the exchange rate movement for those more focused on the short-term return. The expectation at the start of the year that the NZ dollar would strengthen (go up) against all currencies except the Australian dollar was correct. However, there were times, in the first six months and the last two months of the year, when the NZ dollar did the opposite. This is seen by looking at the US exchange rate. The movement in the NZ:US exchange rate over the last 12 months varied between 65 cents and 80 cents. It was:

On the SuperLife website, under investments, is a series of graphs showing the recent trend in the NZ dollar against the major currencies. For members who are interested in following the trend of the NZ dollar, the graphs are updated several times each month.

We have always argued that the NZ exchange rate reflects  money flows. It is the outcome of other events, as opposed to the driver of such events. If the NZ dollar goes up, it is because money is flowing into NZ i.e. NZ is doing well as a country, or overseas investors think that NZ is a good place to invest money. There is a relative position. We do not have to be good, just better than other countries.

So what will happen in 2011?

Like all economists, investment advisors and experts, we do not know what will happen to the NZ dollar over the next month or the next 12 months. We expect that the pattern for 2011 will be similar to 2010.

• the US dollar and UK pound will stay weak
• the Euro and the Yen will weaken further
• the Australian dollar will stay stronger than normal.

However, at some point, the UK and the US economy may bottom and as a result their businesses will become competitive on a global basis. When this happens, their currencies will begin to strengthen. We expect that this is some way off and not in 2011.

Therefore in 2011, we expect that our exporters will make more product, sell it overseas and bring back the money. Also, we will sell holidays to tourists (currently Australians) who came here because it’s “cheap”.

In both scenarios, money flows into NZ and should support the NZ dollar but not against Australia. Several years ago, overseas investors invested significant amounts in New Zealand because our interest rates were high. At the time they were 8% to 9%. Today, they are still higher than most developed countries, but not as high as Australia – one of many reasons why the Australian dollar continues to be strong.