Who Would Have Guessed? 2020 Caps Off Stellar Decade for Investors
To the average investor, 2020 was nothing short of confounding. Had one received magical insight at the start of the year that the world would become engulfed by a devastating pandemic, surely, they would have reduced risk and missed out on some strong returns from equity assets. Aided by exceptionally low interest rates, government fiscal injections and rapid-fire vaccine development, most share markets were able to recover from a first quarter collapse to end the year well in the black. Indeed, who would have thought!
However, not all asset classes delivered the goods, as highlighted by Mercer’s ‘Periodic Table’ of investment returns. Produced annually, the Table colour-codes 16 major asset classes and ranks how each performed, on an annual basis, over the last ten years.
An interactive version of the Table can be found here.
A quick glance at the Table shows how one year’s winners can quickly become next year’s losers, and vice versa. Predicting what may happen next poses a big challenge to even the most avid market followers.
A simple story for 2021
• The US economy is recovering and should gain momentum as the stimulus measures as mobility recovers
• China’s economy finished 2020 growing rapidly and there are hopes that this will continue
• Europe should manage a belated recovery since the third wave dissipates and the vaccine rollout accelerates
• Superficially, the world looks set for a strong 2021-2022
• Fixed interest assets like bonds and Term Deposits will provide a very low yield or interest rate. Sometimes bonds can be negative if the long-term interest rates rise
• Unlike the Global Financial Crisis (GFC), the COVID-19pandamic has represented a shock to both the demand and supply sides of the global economy. The world is poorer as a result, but in the US and Australia, including New Zealand, paper wealth has been raised by the governments’ unprecedented actions.
• Listed company earnings (profits) are going to be strong in 2021/2022 years compared to last year.
• Reserve Bank in New Zealand is keen to leave short term rates (Official Cash Rate (OCR)) low to stimulate the economy. Current OCR is 0.25%.The OCR influences the price of borrowing money in New Zealand and provides the Reserve Bank with a means of influencing the level of economic activity and inflation.
• An OCR is a conventional tool by international standards. In the past, the Reserve Bank used a variety of tools to influence inflation, including influencing the supply of money and signalling desired monetary conditions to the financial markets. Such mechanisms were more indirect, more difficult to understand, and less conventional.
Tax changes
Last year, the Government introduced, under Parliamentary urgency, legislation for the new 39% personal tax rate on income above $180,000. The new rate will apply from 1 April this year (the 2021-22 income year).
Consequential changes
The Taxation (Income Tax Rate and Other Amendments) Bill also contains several consequential amendments:
• A new Fringe Benefit Tax (FBT) rate of 63.93% for all-inclusive pay above $129,681 and the single rate and pooling of non-attributed fringe benefit calculations.
• A 39% Resident Withholding Tax (RWT) rate for individuals on interest income.
• An Employer Superannuation Contribution Tax (ESCT) rate of 39% on superannuation contributions for employees whose ESCT rate threshold amount exceeds $216,000. (The ESCT rate for contributions in respect of past employees and contributions to defined benefit schemes will also be 39%.)
• A 39% Residential Land Withholding Tax (RLWT) Rate (on residential land sales by offshore persons within the bright-line period), except where the vendor is a company.
• A new 39% non-declaration rate for taxable Maori Authority distributions, where a member has not provided an IRD number.
All bar the RWT rate change will also apply from 1 April 2021.
Great news for investors using PIE investments. There is no change to PIE tax rates for individual investors or to RWT on dividends.
Therefore, you do not need to make any changes to your KiwiSaver, NZRT or any PIE funds in your Wrap accounts.
Please do not hesitate to contact our office at info@trilogyfs.co.nz if you have any questions.