Special announcement: COVID-19
Market update 7 –
Rising markets are not an enigma
The road to recovery for the global economy will be long, reflecting the reality of the economic ‘sudden stop’. However, after the volatility in March, global share markets are now 22% off their lows with the United States and New Zealand share markets up 24% and 26% respectively since 23 March.
NZ Funds has outperformed as the share market recovers
The table below highlights the performance of a typical NZ Funds KiwiSaver Growth client versus our major competitors. Not only did we successfully mitigate the downside, (see Special announcement: COVID-19 Market update), we have participated fully in the market rebound given our positioning we outlined in Special announcement: COVID-19 Market update 3.
Uncertainty prevails, what’s next?
The next phase in the pandemic-induced economic cycle could be somewhat soggy. After large bouts of volatility in March, followed by the euphoria in April created by extreme government stimulus, the economic reality will start to set in as people digest the economic impact of COVID-19.
A key short-term negative catalyst is United States companies reporting their first quarter 2020 earnings. In the next six months we may see markets give up some of the gains made over the past few weeks. The journey will remain volatile and we retain options to mitigate further bad news.
Looking beyond the short-term
With company valuations significantly lower and interest rates near zero, there will be large capital flows into share markets, driving up share prices. At the same time, we are likely to witness a rebound in economic growth as companies fulfil backorders as social distancing restrictions are eased. Clients’ portfolios are positioned to participate in this continued recovery.
Not all sectors are created equal
Unfortunately, some sectors won’t be so lucky. Negative growth and high unemployment will continue in tourism, hotels, gaming and property for years to come. Active portfolio management has become extremely important. Together with our global investment managers, we have positioned clients away from these stressed sectors towards sectors which have a competitive advantage or stability in earnings.
Examples include technology companies such as Zoom which has witnessed a daily usage increase of 400%. Microsoft Teams, once an unknown addition to the Microsoft Office suite, is now front and centre for companies to do business.
Closer to home, the telecommunications sector has allowed the majority of New Zealanders to work from home, with Chorus and Spark managing huge increases in usage across their networks. These achievements are reflected in the positive share price performance of these companies.
We remain positive
As we wrote in Special announcement: COVID-19 Market update 6, it is possible, when the global 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.
Therefore, despite expected short term headwinds following a strong market recovery over the past few weeks, we continue to see 15 – 20% upside in share markets over the next 12 – 24 months. Any large drawdown, we will continue to mitigate as we did when COVID-19 took hold.
Long term, this is stage one of the recovery and for those with longer term time frames, share market returns will be substantially higher.
Staying the course
Returning to what we said in Prepared for Coronavirus - Portfolio positioning for 2020, when the world was only beginning to realise the extent of COVID-19, it is extraordinarily difficult, if not impossible, to time markets. There are always events which provide a reason not to invest. However, years out of the market can result in lower average returns than remaining invested and experiencing a downturn.
We therefore recommend clients continue as usual as our investment approach will help to mitigate a downturn. At the same time, clients’ portfolios are positioned to participate in the continued long-term recovery.
Be kind. Stay home. Stay safe. Save lives.
NZ Funds has outperformed as the share market recovers
The table below highlights the performance of a typical NZ Funds KiwiSaver Growth client versus our major competitors. Not only did we successfully mitigate the downside, (see Special announcement: COVID-19 Market update), we have participated fully in the market rebound given our positioning we outlined in Special announcement: COVID-19 Market update 3.
Uncertainty prevails, what’s next?
The next phase in the pandemic-induced economic cycle could be somewhat soggy. After large bouts of volatility in March, followed by the euphoria in April created by extreme government stimulus, the economic reality will start to set in as people digest the economic impact of COVID-19.
A key short-term negative catalyst is United States companies reporting their first quarter 2020 earnings. In the next six months we may see markets give up some of the gains made over the past few weeks. The journey will remain volatile and we retain options to mitigate further bad news.
Looking beyond the short-term
With company valuations significantly lower and interest rates near zero, there will be large capital flows into share markets, driving up share prices. At the same time, we are likely to witness a rebound in economic growth as companies fulfil backorders as social distancing restrictions are eased. Clients’ portfolios are positioned to participate in this continued recovery.
Not all sectors are created equal
Unfortunately, some sectors won’t be so lucky. Negative growth and high unemployment will continue in tourism, hotels, gaming and property for years to come. Active portfolio management has become extremely important. Together with our global investment managers, we have positioned clients away from these stressed sectors towards sectors which have a competitive advantage or stability in earnings.
Examples include technology companies such as Zoom which has witnessed a daily usage increase of 400%. Microsoft Teams, once an unknown addition to the Microsoft Office suite, is now front and centre for companies to do business.
Closer to home, the telecommunications sector has allowed the majority of New Zealanders to work from home, with Chorus and Spark managing huge increases in usage across their networks. These achievements are reflected in the positive share price performance of these companies.
We remain positive
As we wrote in Special announcement: COVID-19 Market update 6, it is possible, when the global 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.
Therefore, despite expected short term headwinds following a strong market recovery over the past few weeks, we continue to see 15 – 20% upside in share markets over the next 12 – 24 months. Any large drawdown, we will continue to mitigate as we did when COVID-19 took hold.
Long term, this is stage one of the recovery and for those with longer term time frames, share market returns will be substantially higher.
Staying the course
Returning to what we said in Prepared for Coronavirus - Portfolio positioning for 2020, when the world was only beginning to realise the extent of COVID-19, it is extraordinarily difficult, if not impossible, to time markets. There are always events which provide a reason not to invest. However, years out of the market can result in lower average returns than remaining invested and experiencing a downturn.
We therefore recommend clients continue as usual as our investment approach will help to mitigate a downturn. At the same time, clients’ portfolios are positioned to participate in the continued long-term recovery.
Be kind. Stay home. Stay safe. Save lives.
Source: Asset allocation sourced from December 2019 Fund Updates, except for NZ Funds stated as at 10 April 2020 to reflect change in asset allocation; Booster KiwiSaver Scheme Geared Growth asset allocation based on 24 March 2020 PDS disclosure.
1. Includes listed property.
2. Includes unlisted property.
3. NZ Funds estimates. Year-to-date (as at 10 April 2020) performance of market rise 20% and reach 19 February 2020 highs assumes all growth assets perform the same.
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.
1. Includes listed property.
2. Includes unlisted property.
3. NZ Funds estimates. Year-to-date (as at 10 April 2020) performance of market rise 20% and reach 19 February 2020 highs assumes all growth assets perform the same.
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.
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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.
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