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Share Market Lessons

Investors have been on a rollercoaster ride in recent times. Chris Smith looks back over the 15 years CMC Markets has been in New Zealand and reflects on learnings.

5 October 2021

Over the past 15 eventful years, I’ve seen markets experiencing extraordinary swings as historic and unprecedented developments drove the financial world.

When CMC Markets first opened its doors in Auckland in 2006, the New Zealand top 50 share market index was below 3,400 points, and a NZ dollar cost 63 US cents.

The Official Cash Rate (OCR) set by the Reserve Bank of New Zealand stood at a level high by today’s standards, at 7.25 per cent.

Today, the NZX has risen to 12,700 and the Kiwi dollar is at 73c versus the US dollar. The Official Cash Rate has plummeted to 0.25 per cent.

What a lot has changed. Let’s look back and see some of things I’ve learned from it.

YouTube was a newbie

Fifteen years ago, YouTube was the hot new player on the internet, later selling to Google for US$1.65 billion dollars, a figure it makes in revenue each month in 2021.

Social networking service Twitter launched at almost the same time as CMC introduced New Zealand’s first mobile trading platform in 2006.

I saw two major global crises over this time and many mini and scary corrections as market moves amplified in speed as the years passed.

The Global Financial Crisis (GFC) struck in 2007-09 and then the COVID-19 rout in March last year blindsided investors.

I recall talking about yet another bank that was almost out of business being saved most Monday mornings on ASB breakfast television.

Most have survived and prospered since, with huge government support.

Both crises saw big falls in the values of Kiwis’ portfolios, but each event unfolded differently.

The GFC wiped 45 per cent off the value of the NZX 50 index and took 17 painful months to unfold. The low was March 2009, when the S&P500 index hit around 666 (versus 4200 today).

The COVID-19 crisis last year was more savage, taking just a month to drag the share market 32 per cent lower.

Some lessons

We can take two important lessons from these sharp market sell-downs.

The first is that higher market volatility is scary, and the speed of the corrections is getting shorter, so time to react needs to be faster, but it’s good news for traders who prefer volatility to create opportunities in short term.

The share market continues to be, and always will be, very forward-looking, which frustrates watchers of the markets.

The market is also very irrational at times and investors should always remind themselves of Benjamin Graham’s famous reference of the market as ‘Mr Market’, happy or angry on different days.

Over both these crises, having access to shorting or hedging was important – as was cutting out the noise in markets.

Investors are easily influenced by media and emotions, so I’d encourage you to build a strong resilience to the ups and downs of the market, so you can make clear-headed decisions and not rely on hope as an investing strategy.

The good years

And, of course, over this time there were many good years for Kiwi investors and traders.

Action from the Reserve Bank of New Zealand, as well as central banks around the globe, supported shares and bonds, and created other new asset classes. This played a big role in lifting market returns and avoiding recessions.

Lower interest rates and yield-chasing were key factors helping the NZX 50 hit its all-time high in January this year, above 13,400.

Local investors who stayed positive and optimistic outperformed in market tumbles, and shared in the gains as markets and stock prices recovered.

Many of CMC’s Kiwi clients have traded the big swings in value in the New Zealand dollar over the past 15 years.

The Kiwi dollar has swung between a high of 88 US cents, and a low of US 50 cents. But overall, the New Zealand dollar stays in a tight band for our exporters and importers.

The strength of the New Zealand economy meant that twice the Kiwi dollar has been close to equal with the Australian dollar.

It’s pulled back from 99 Australian cents both times, but it’s worth bearing in mind that a lower local currency gives Kiwi businesses a leg-up on our trans-Tasman neighbours.

What to expect now

The financial markets are in full ‘hopism’ and recovery mode after an unprecedented period of global disruption and stimulus.

Major tech firms are continuing to post record numbers and benefit from the global digitalisation in business and consumer behaviours. Vaccines are providing hope for the hardest-hit businesses, and many will come out of the COVID period stronger than before.

We’re in the middle of the greatest economic experiment ever attempted, but we have many reasons to be hopeful.

Debt levels are always at record levels since the GFC and interest rates continue to be very accommodative, so working out how it can return to pre-2008 norms is hard to imagine.

Working out what the new normal will be going forward is near-impossible, but many will try to predict it.

Importantly, everyone has different investment horizons and goals. The market has more than 20,000 companies listed and caters for all types of investors.

Market corrections will continue to be reported as headline news, and technology will widen the global investment universe for all New Zealanders.

I feel that New Zealand’s strength and diversity, from our people and geography to our institutions, mean this country is in a good position to face the ups and downs of the global financial markets and being internationally diversified has never been easier.

For one, I’m looking forward to the next 15 years and seeing what the next major innovations emerge for investors and traders.

CMC Markets

CMC Markets New Zealand team has forged strong relationships with local communities over the 15 years it’s been operating in this country.

It’s been a long-standing sponsor of Variety – The Children’s Charity.

Its commitment to making the financial markets more accessible and financial education meant CMC Markets has supported University Trading Challenges throughout New Zealand for many years.

This initiative has given hundreds of university students the chance to take their trading knowledge out of the lecture theatre and apply it in the real world.

More recently, CMC Markets NZ has also stepped on board as a major partner of the Blues Super Rugby team.

www.cmcmarkets.co.nz

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