Will there be a 'Market Correction' in 2015?
It is a scary question and one for which I don't have a reliable answer. There will be a market correction at some point in the not too distant future. It is a natural part of our capitalist system. It's the medicine we don't want to take but need to take. No amount of political meddling can prevent it, eventually. The timing is hard to predict because politicians (and those reliant on maintaining the status quo) will kick the proverbial can down the road for as long as they are able. In effect a market correction (aka crisis) is inevitable. Bank economists never want to predict one and can't. The market is driven by confidence so the bank's can hardly show a lack of confidence even when the system is fundamentally stuffed. What if the GFC was just the start? Could we see some sort of market correction in 2015 and if so, are you ready? I can't tell you when it will happen only that lots of big problems exist any of which could cause it. What I can do is help you be better prepared by acknowledging the risks. Some of the things that could trigger the next crisis:
- A Sovereign default in Europe (Spain, or Greece round 2)
- Another bank default (probably in Europe)
- Russian economic crisis
- Falling commodity prices (in particular oil price)
- Chinese property bubble or shadow banking system blowing up
- Share market sell off similar to 1987 (starting in the US driven by just about anything and magnified by derivatives and synthetic hedging)
- Emerging market crisis driven by a strengthening USD
These are just the obvious triggers and it could be driven by something far less obvious. Market corrections are in a way an opportunity because if you're one of the few who are prepared then you can do very well on the other side of it. It requires zigging when others zag. It means ignoring 'hype' and it means largely ignoring our main stream media. It means not being too greedy, knowing when to hold and when to cash out. As I write I am finding myself mentally singing the Gambler. In a nutshell cash is king. From a property perspective, my view is that now is not the time to be over leveraged. You should be working to lower your loan to value ratio, not leveraging up to buy more property. Get yourself into a position to buy assets when prices fall.
For some alternative perspectives on the potential of a global market correction, check out the recent ‘Money Special’ edition of the NZ Listener.
So what I'm doing?
Personally I haven't bought an investment property for two years now. That doesn't mean I won't buy, I just haven't seen anything that meets my criteria which is firmly focused on yield. So, instead I'm focused on finishing a property development project. It's mostly sold down already and will be finished mid this year. The proceeds from this will go one hundred percent into repaying debt. By the middle of this year, I'll be down to around 30% LVR and intend to stay there. Any extravagances (like renovating the house) are on hold which Anna-Lisa (the wife) is not impressed about!
From a business perspective I'm continuing to diversify our revenue to make sure it is more resilient to a downturn. That means more reoccurring revenue streams, broader market reach, and flexibility around expenses. You may have seen in the media that we are in the process of getting licensed for peer-to-peer lending and are also looking at Kiwi Saver. Both of these are about diversification as much as market opportunity. We're also making our staff shareholders in the business. That's about giving them a stake, but also making sure they understand cashflow. Squirrel was born during the GFC so we had it hard from the start. That's engrained a real focus on expense management and making sure we can adjust expenses down quickly if market conditions deteriorate. I always plan a "worst case" scenario of a 30% drop in volumes and that's in the context of a business that has grown 30% YOY for the past six years. Personally, I am moving my Kiwi Saver into a low risk 'cash' portfolio. That probably sounds way too conservative. I'm happy for lower returns over the next few years for capital preservation. (That's a personal decision based on my own personal situation ... which is complicated. It is not financial advice. You should consult your financial advisor for personal advice on any shares or investments you have and on your own personal situation.)
From a lending perspective I still have most of my personal lending with ANZ and are happy with that. I've split the Business from my personal affairs so they are completely separate and I've set up around $600,000 of what will be available revolving facilities once the Development is finished. I'm also looking at bringing in external capital to Squirrel (possibly listing on the NXT Exchange end of 2015) to make sure we have a strong balance sheet to take advantage of growth opportunities as they arise. I want to use more equity and not borrow nearly as much as I have over the past five years.
My situation will be very different to yours. For a start I'm heavily exposed to property through investments, development and through my businesses which are mostly property related. I have every reason to feel more concerned about where the market might go. I say might, because my view of the world could be completely wrong and there will be plenty of people who think so. Hopefully, what you'll see from the above is that I'm continually looking at growing the business and everything that I do, but at the same time making sure there is always plenty of fuel in the tank. Crises are a natural part of life. We don't know when they'll come and there's no point stressing about them. It's simply about being prepared and thinking through your game plan should one bite. At the very least think about what you'd do, and what you can do to be better prepared. Don't procrastinate and be prepared to make the difficult decisions now. If a property is a poor performer going forward, sell it! Equally don't base your assessment of a property on what you paid for it. Assess it on what it is worth now. What you do with your investments or your business are very personal things and specific to your situation.
I'd highly recommend seeking our advice from a range of sources (Accountant, Business Advisor, Financial Advisor.) But also understand that nobody really knows what is going on - it's all about acknowledging the risks. You need to decide how much risk you're prepared to take with your life savings, then make sure you have a game plan, and most importantly, execute it.