Special announcement: COVID-19
Market update 6 – positive news cycle
The human tragedy of COVID-19 is real, especially in hard-hit places like New York, Italy and the looming crisis in many developing countries. However, there is reason to be more optimistic. Positive news has altered the trajectory of the economy and financial markets. The New Zealand and global share markets are both trading significantly above their lows reached on 23 March 2020.
As we wrote in Special announcement: COVID-19 Market update 3, given the financial support from governments across the globe, we moved to fully invest clients’ growth portfolios. When we think about where financial markets might be in one, three, or five years’ time, it is hard to bet against the support governments are providing. Markets have not and will not wait for the virus all-clear signal to recover.
The change in news cycle
Initially, financial markets were struggling to gauge the impacts of COVID-19. This complacency gave us an opportunity to become more defensive and mitigate the selloff in share markets. The news cycle went from ‘good’ to ‘extremely bad’, very quickly. This drove share markets down over 33% from their highs.
Despite the long road ahead to get the global COVID-19 pandemic under control, the news has become more positive. The ‘extremely bad’ news is now ‘not as bad’. As witnessed during the 1918 flu pandemic and the 2009 global financial crisis, this subtle change in sentiment is a big driver for share markets.
Below we list the top ten positive news stories involving COVID-19 and financial markets. There is little wonder that New Zealand shares1 are over 20% off their lows and United States2 and global shares3 are up over 23% and 20% respectively. We expect this trend to continue.
News flow change in sentiment
1. Government support. In the United States, the $2.2 trillion stimulus package in a $21 trillion dollar economy is breath-taking. Furthermore, the $2.2 trillion may end up being just a ‘down payment’ with more fiscal measures to come. New Zealand announced one of the largest spending packages in the world on a per capita basis.
2. New Zealand companies are recapitalising. Air New Zealand has been bailed out by the Government. Meanwhile, NZ Funds’ clients participated in the recapitalisation of Auckland Airport and Kathmandu. Purchasing high quality companies at discounted valuations is not only positive for our clients, the companies themselves are now better placed to survive the crisis.
3. Investment opportunities. Volatility leads to opportunity. There are high quality companies in New Zealand and globally that we can purchase for cheap valuations. As Warren Buffett says: “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”
4. New Zealand to benefit from China reopening. Trade with China is beginning to pick up again, in particular for the agricultural sector but others are showing signs of renewed life. Fonterra chief executive Miles Hurrell said at a media briefing that the food service sector in China was nearly back to normal, with 90% of Starbucks and McDonalds open across the country.
5. We are working on a cure. Johnson & Johnson said it had identified a vaccine candidate and the United States government was investing $1 billion in its development. Moderna Therapeutics started human trials for a new kind of vaccine back in mid-March. That’s the fastest the world has ever gone from identifying a new disease to conducting vaccine trials in people.
6. We know how to slow the spread. In China, Singapore and other affected countries, social distancing played a big part in turning the tide. As we have found in New Zealand, acting early and following the advice is crucial, and we all have a part to play.
7. Testing is increasing rapidly in most countries. The United States has come a long way since the botched rollout of its diagnostic test in February. About two million people have been screened for coronavirus. In New Zealand testing numbers are increasing to 5000 a day, a 35% increase.
8. Hard hit countries are stabilising. The centre of Italy’s coronavirus outbreak has seen a sustained decline in the rate of new infections. Meanwhile, the United States and United Kingdom may reach their peak sooner than expected.
9. People do recover. Around the world, many are recovering from the infection. Often this is thanks to the hard work of medical staff and the people who support them.
10. Community response. Individuals and business community response has been overwhelming. NZ Funds played a part by launching a free KiwiSaver hotline (0800 698 884) for all New Zealanders. Other great examples include TVNZ and Les Mills bringing fitness classes to Kiwis living rooms and the Student Volunteer Army providing childcare for the tamariki of healthcare professionals and a grocery store delivery system for those aged over seventy.
It is possible that when the lockdowns are eventually eased, there will be a V-shaped growth recovery. The level of economic growth and business earnings are unlikely to return to prior peaks for some time, but the pace of improvement could be fast, especially given the government policy conditions.
The journey will remain volatile and we retain options to mitigate further bad news. However, as we wrote on 20 March, the median recovery period following a share market fall of 20% or more is only 211 trading days.
If we were to wait for a vaccine the market may have already increased beyond its previous highs. Markets do not wait for the all-clear signal and with support from government, healthcare professionals, scientists and the community across the globe, we are confident we are well positioned for the future.
Be kind. Stay home. Stay safe. Save lives.
As we wrote in Special announcement: COVID-19 Market update 3, given the financial support from governments across the globe, we moved to fully invest clients’ growth portfolios. When we think about where financial markets might be in one, three, or five years’ time, it is hard to bet against the support governments are providing. Markets have not and will not wait for the virus all-clear signal to recover.
The change in news cycle
Initially, financial markets were struggling to gauge the impacts of COVID-19. This complacency gave us an opportunity to become more defensive and mitigate the selloff in share markets. The news cycle went from ‘good’ to ‘extremely bad’, very quickly. This drove share markets down over 33% from their highs.
Despite the long road ahead to get the global COVID-19 pandemic under control, the news has become more positive. The ‘extremely bad’ news is now ‘not as bad’. As witnessed during the 1918 flu pandemic and the 2009 global financial crisis, this subtle change in sentiment is a big driver for share markets.
Below we list the top ten positive news stories involving COVID-19 and financial markets. There is little wonder that New Zealand shares1 are over 20% off their lows and United States2 and global shares3 are up over 23% and 20% respectively. We expect this trend to continue.
News flow change in sentiment
1. Government support. In the United States, the $2.2 trillion stimulus package in a $21 trillion dollar economy is breath-taking. Furthermore, the $2.2 trillion may end up being just a ‘down payment’ with more fiscal measures to come. New Zealand announced one of the largest spending packages in the world on a per capita basis.
2. New Zealand companies are recapitalising. Air New Zealand has been bailed out by the Government. Meanwhile, NZ Funds’ clients participated in the recapitalisation of Auckland Airport and Kathmandu. Purchasing high quality companies at discounted valuations is not only positive for our clients, the companies themselves are now better placed to survive the crisis.
3. Investment opportunities. Volatility leads to opportunity. There are high quality companies in New Zealand and globally that we can purchase for cheap valuations. As Warren Buffett says: “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”
4. New Zealand to benefit from China reopening. Trade with China is beginning to pick up again, in particular for the agricultural sector but others are showing signs of renewed life. Fonterra chief executive Miles Hurrell said at a media briefing that the food service sector in China was nearly back to normal, with 90% of Starbucks and McDonalds open across the country.
5. We are working on a cure. Johnson & Johnson said it had identified a vaccine candidate and the United States government was investing $1 billion in its development. Moderna Therapeutics started human trials for a new kind of vaccine back in mid-March. That’s the fastest the world has ever gone from identifying a new disease to conducting vaccine trials in people.
6. We know how to slow the spread. In China, Singapore and other affected countries, social distancing played a big part in turning the tide. As we have found in New Zealand, acting early and following the advice is crucial, and we all have a part to play.
7. Testing is increasing rapidly in most countries. The United States has come a long way since the botched rollout of its diagnostic test in February. About two million people have been screened for coronavirus. In New Zealand testing numbers are increasing to 5000 a day, a 35% increase.
8. Hard hit countries are stabilising. The centre of Italy’s coronavirus outbreak has seen a sustained decline in the rate of new infections. Meanwhile, the United States and United Kingdom may reach their peak sooner than expected.
9. People do recover. Around the world, many are recovering from the infection. Often this is thanks to the hard work of medical staff and the people who support them.
10. Community response. Individuals and business community response has been overwhelming. NZ Funds played a part by launching a free KiwiSaver hotline (0800 698 884) for all New Zealanders. Other great examples include TVNZ and Les Mills bringing fitness classes to Kiwis living rooms and the Student Volunteer Army providing childcare for the tamariki of healthcare professionals and a grocery store delivery system for those aged over seventy.
It is possible that when the lockdowns are eventually eased, there will be a V-shaped growth recovery. The level of economic growth and business earnings are unlikely to return to prior peaks for some time, but the pace of improvement could be fast, especially given the government policy conditions.
The journey will remain volatile and we retain options to mitigate further bad news. However, as we wrote on 20 March, the median recovery period following a share market fall of 20% or more is only 211 trading days.
If we were to wait for a vaccine the market may have already increased beyond its previous highs. Markets do not wait for the all-clear signal and with support from government, healthcare professionals, scientists and the community across the globe, we are confident we are well positioned for the future.
Be kind. Stay home. Stay safe. Save lives.
Source: Bloomberg, MSCI AWCI in local currency (index), Dow Jones Industrial average (index). World Health Organisation.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
New Zealand Funds Management is the issuer of the NZ Funds KiwiSaver Scheme. A copy of the latest PDS for the Scheme is available on request or by visiting the NZ Funds website at www.nzfunds.co.nz.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
New Zealand Funds Management is the issuer of the NZ Funds KiwiSaver Scheme. A copy of the latest PDS for the Scheme is available on request or by visiting the NZ Funds website at www.nzfunds.co.nz.
***
James Grigor is Chief Investment Officer for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. James' comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
***
