An early Christmas for New Zealand investors

Media release
Embargoed until 6am, Tuesday, 25 September, 2007

An early Christmas for New Zealand investors

2007 will go down in history for its impact on the growth of New Zealand’s financial savings and managed funds industry, according to the latest Arcus quarterly investment strategy update.

Arcus Investment Management Chief Investment Officer Peter Verhaart says tax changes that reward those who save and the introduction of KiwiSaver will boost the local funds management industry.

“The significant disincentives that have existed for investors in managed funds relative to ‘do it yourself’ or DIY investments, particularly residential property, have been significantly reduced.”

“In fact, for many investors, managed funds will provide tax savings as well as the benefits of diversification and external investment expertise.”

“The other key change in the new tax environment is that passive management of equities no longer has a tax advantage. Actively managed funds are expected to enjoy an increase in popularity,” says Mr Verhaart.

Mr Verhaart says local fund managers will generally be increasing their long term exposure to the local sharemarket to take advantage of the new tax environment. However, the impact over the short term is likely to be tempered by both market size limitations and concerns surrounding the local economy.”

Commenting on the wider economic outlook, Arcus Chief Economist Rozanna Wozniak says the prospects for the New Zealand financial, corporate and households sectors are reasonably secure, but the possibility of a hard landing for some has increased.

“The booming dairy sector is expected to provide a boon for parts of rural New Zealand, but the benefits will not spread wide enough to cushion much of the household sector from very high interest rates and high levels of indebtedness.”

“There are signs that some New Zealand consumers are starting to experience financial stress and this stress is manifesting itself through the collapse of finance companies.”

“If the housing market continues to weaken as expected, it will add to the pressures facing finance companies.”

Ms Wozniak says a key area of concern for local households is their increased levels of borrowing and low holdings of liquid financial assets.

“Household balance sheets are heavily dependent on housing assets, which are relatively illiquid and not easily sold if households become strapped for cash.”

In comparison, Ms Wozniak says companies in many parts of the world have been reducing debt over recent years and increasing their holdings of liquid assets. She says those liquid assets provide the capability to withstand the current credit squeeze – a squeeze that Arcus believes will be temporary.

Ms Wozniak says the outlook for global equities remains positive.

“Economic growth continues to be strong, with Australia and non-Japan Asia helping to fill the gap left by a soft US economy. Furthermore, companies in many parts of the world are enjoying robust earnings growth. Australia, in particular, continues to provide opportunities for investors.”

She says given the risks surrounding the local economy and with New Zealand companies struggling to generate earnings growth, it is difficult to justify why the local sharemarket is trading at a higher valuation than the Australian market.

“We believe this situation is unsustainable. We have been cautious about the outlook for local equities for some time and our concerns have increased over the last few months,” says Ms Wozniak.

ENDS

See... Arcus_QSP_Sep07.pdf

Editors note:

Most investments in international shares are now being taxed under the Fair Dividend Rate (FDR) regime that came into effect on 1 April 2007. Under FDR, taxable income on the international shares component (excluding most listed Australian companies) in managed funds is now assessed at 5% of the market value of the portfolio, less any costs to run the funds.

October 1 will see the introduction of the Portfolio Investment Entity (PIE) rules. Managed funds that meet certain criteria can elect to become PIEs. This means investors will be offered a capital gains tax exemption for New Zealand listed shares and most Australian listed shares - and potentially lower tax rates for investment income.

About Arcus Investment Management

Arcus manages over NZ$5 billion of assets across the major asset categories of international equities, domestic equities, property, fixed interest and cash. Arcus Investment Management is a subsidiary of AXA New Zealand.

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