Opinion, by Denis McMahon, chair of the Tauranga-based syndicator & funds manager PMG Ltd
2 weeks into the 2019 financial year, there are some very important trends emerging & playing out in the world which I believe will be affecting our lives, and investments, for some years to come.
The US got off to a good start in January, with most forecasters predicting a good year but not a stellar one. There has been a good deal of exuberance in the US stock market and many commentators are expecting earnings to grow, despite recent volatility.
The World Bank is predicting global growth of 3.1% – again, not spectacular, but something we need to get used to in a global environment of low inflation.
There are housing bubbles in Canada, Australia, China and, as most argue, in New Zealand (specifically in the main centres), although China appears to be stalling at present. Property bubbles are always a cause for concern as they always involve leverage and, as 2007-09 showed only too clearly, once people are unable to service the debt, the dominoes start to tumble.
But for me, the biggest threat to stability & progress around the world is the spectacular rise in populist politics. A lot of this is a backlash against decades of globalisation, as evidenced by the rise in protectionist policies. Ironically, this is happening at a time when the US is stepping back from its traditional role of global leader & guarantor of what is being called the Pax Americana.
Since the end of World War 2, the world has had the US enforcing the spirit of free trade, but I suspect those days are gone. The benefits of globalisation have not been evenly distributed and we are now seeing the backlash.
Globalisation has, since the 1970s, seen the transfer of millions of jobs from the US to emerging countries and that has changed the relative value of capital & labour the world over. One of my favourite historians, Niall Ferguson, has said that around 40 million Americans lost their jobs in the global financial crisis and the backlash is starting to be felt.
The same story is playing out in Europe, where populism is on the rise as a backlash against the EU, who have completely ignored the massive concern shown by many member states over both the EU’s mismanagement of the financial crisis and its apparent failure to stop over a million people entering its member states in an uncontrolled fashion.
- Austria has elected a 31-year-old anti-immigration candidate as chancellor
- Italy’s populist & digitally progressive Five Star Movement won the most votes, nearly 33% in the 4 March election
- German Chancellor Angela Merkel won the election but it took 5 months of negotiations & compromises for her to be able to form a government because of the strong showing by the populist Alternative for Germany party
- Our own elections in September, showed an increasing number of people wanted change to the existing National establishment. Although National received the most votes, Labour’s new young, female leader saw support for Labour rise rapidly in the few short weeks leading up to the election.
Ferguson believes it is the beginning of the end for the EU and I suspect he’s right. So, when you start to see the rise in populism coupled with a rise in protectionism, you can well expect disruption in the markets.
Meanwhile, back in “Shortland Street”, business has typically not reacted well to the election of a
Labour-NZ First government, with polls showing a sharp drop in business confidence. To be fair, this is nothing new, as 2000 was a particularly bad year for business following on from the election of the Clark-led government in 1999.
What was different then was that they then had 7 years of arguably the best economic times in decades to mitigate the perceived negativity. They will certainly not have that this time around. With so much uncertainty and a low inflationary environment, it’s hard to see any current justification for a hike in interest rates. However, with Labour clearly signalling their desire for higher wages, this will feed through into the economy and generate some inflationary pressure, possibly resulting in interest rate rises.
We’re certainly seeing some very interesting trends, which all point towards increased market volatility and, in my view, reinforcing the need for a defensive portfolio approach & diversification in your investment strategy.
I’ll watch with much fascination to see what unfolds here & overseas in FY19.
Mr McMahon has been working in, managing & investing in property for 33 years, starting in Auckland, where he managed a property portfolio (including 2 retirement villages) for a local council body, which led to a position as manager of property & legal services for the Tauranga City Council in 1990. This work included rationalising the newly amalgamated authority’s property portfolio over a 2-year timeframe.
He set up Property Managers Ltd in 1994, introducing investors to property syndication. In 2014 with Phil Tushingham, he co-founded Pacific Property Fund Ltd, PMG’s first managed property fund.
In 2013, Mr McMahon became chair of PMG, following the appointment of Scott McKenzie as chief executive.
The portfolios PMG manages include Pacific Property Fund Ltd, which invests in geographically & category-diverse properties; 2 funds which invest in category-specific properties, PMG Direct Office Fund & PMG Direct Fund; and a private equity fund, PMG Capital Ltd.
Disclaimer: The Bob Dey Property Report & Bob Dey Publishing Ltd do not have a policy on opinions & their slant, other than that they ought to relate to property. Bob Dey believes nobody is right 100% of the time, including himself. Opinion pieces such as Denis McMahon’s are presented to you unedited, apart from fitting the website’s style.
Attribution: Denis McMahon.