The role of economic cycles in investment decision-making

Here are some valuable lessons we have learned as wholesale investors.
The role of economic cycles

With New Zealand officially in a technical recession (after two consecutive quarters of negative GDP), it’s a reminder that the economy is an organic, growing, and evolving system. But even in a recession there are sectors that are not affected, and may even grow.

As investors, understanding the relationship between economic cycles and the market is a cornerstone to making informed decisions. The most important thing is to have a clear, adaptable plan in place. Here’s some good food for thought.

Unpacking economic cycles

At their simplest, economic cycles are a series of alternating periods of expansion and contraction in a country’s economy.

Variables like production, employment levels, inflation and import-export rates fluctuate, creating ripples that affect financial markets and – by extension – our investments. So, understanding the different phases of these cycles can offer crucial insights into potential investment opportunities and risks.

Typically, an economic cycle has four distinct phases, each with its own characteristics and implications:

  • Expansion: The economy grows, interest rates are typically low, and production is high. There’s constant demand for goods and services, leading to higher employment rates and a steady flow of money in the economy.
  • Peak: The economy reaches its highest point and production is at maximum output. At this point, inflation tends to be high, and so interest rates start to increase as well. Also, the sharemarket tends to slow down, as higher interest rates often mean companies face lower future earnings and some investors will put their money into a higher-interest rate savings account, rather than risking it in the sharemarket
  • Contraction: The economy starts to shrink. Demand for goods and services drops, leading to a slowdown in production. Unemployment rates rise, and the growth rate of the Gross Domestic Product (GDP) decreases.
  • Trough: The economy hits its lowest point. Interest in new purchases is low, and consumers tend to conserve money to meet essential needs. After the trough, the economy starts to recover, leading back into the expansion phase, and the cycle repeats.

It’s interesting to note that, against the odds, global economies have been performing incredibly well in the past few years. Using New Zealand as an example, despite rising interest rates, the unemployment rate has proven to be remarkably resilient.

This confirms how unpredictable the economy can be, and why timing the market is not a sustainable strategy. The only alternative is having a quality long-term plan.

Some key lessons we have learned

In our journey as individual wholesale investors, and now investing managers of the Merx Wholesale 1 PIE Trust, we have learned some valuable lessons on how to approach investing in various economic climates. For example:

  • It’s crucial to keep a long-term view: While understanding economic cycles is important and can affect individual investments in our portfolios, long-term planning with periodic adjustments is the way forward.
  • A well-diversified portfolio is key to riding the economic cycles: By diversifying investments across a variety of asset classes, sectors, and regions, investors can spread their risk and benefit from growth opportunities. While the Merx Wholesale 1 PIE Trust provides diversification within a single-asset class and region rather than across asset classes and regions, it can be part of a broader diversification strategy.
  • Long-term investing requires patience and discipline: Economic cycles can impact market sentiment and cause short-term volatility. However, keeping a steady course and remaining committed to a long-term investment plan is what truly counts.

As lenders, we have experienced first-hand that, even during periods of contraction, there are always opportunities to be found.

Since we started lending to the business sector, Merx has provided more than $150 million in loans and demand for capital continues to increase. We have seen economic and market fluctuations, yet, despite these changes, we continue to see resilient business owners and investors eager to grow their businesses and realise their projects.

In mid-2022, we launched the Merx Wholesale 1 PIE Trust with the goal of supporting these businesses while building the kind of fund we want to be invested in now, and in the years to come for retirement. Being long-time investors ourselves, we agreed that we’d want a debt fund that prioritised aligned interests while delivering diversification within a single asset class, flexibility, and tax efficiency.

It’s a compelling proposition that we’re happy to share with like-minded wholesale investors looking for yield in this ever-changing economy. 

Like to know more?

The Wholesale 1 PIE Trust is a reflection of the management team’s own journey and personal commitment. If you’d like to become part of this journey, click here to learn more and give us a call on 09 215 9364 to discuss further. We look forward to hearing from you. 

Note: This article is intended to provide general information and does not constitute financial advice. We recommend you speak with a financial adviser for advice tailored to your individual circumstances. Potential investors in Merx must qualify as Wholesale Investors as that term is defined in sections 3(2)(a) – (c) or 3(3)(a) of Schedule 1 of the Financial Markets Conduct Act (“FMCA”). The Trust is not suitable for retail investors.

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