Special announcement: COVID-19
Market update 8 – A tale of two markets
At the turn of the year, we had a positive view of financial markets. Geopolitical tensions in Iran failed to escalate, and the United States – China trade war had started to subside. The outlook was bright. However, following NZ Funds’ research trip to Hong Kong in mid-January, we witnessed first-hand how Asian economies were reacting to a newly discovered virus.
It was touch-and- go whether we could easily return to New Zealand given rumours Hong Kong airport would close due to the virus. We immediately pivoted clients’ portfolios to become moderately defensive.
As we continued to discuss the spread of the virus with our global network of experts, we believed markets were being complacent and struggling to gauge (what was now called) COVID-19’s economic impacts. In 10 March 2020 | Market Update 1, we explained how NZ Funds took steps to mitigate the effect of further financial market volatility and hedged 50% of clients’ share market exposure.
There was no better time to buy shares
We wrote in 20 March 2020 | Market Update 3, that we were entering the third phase of our investment strategy and we were focused on benefiting as share markets rebound. In 27 March 2020 | Market Update 4 we stepped through the extent of the stimulus packages announced by governments throughout the world which confirmed our positive view.
In late March and early April, we had the opportunity to buy extraordinary businesses, some of which have been around for 50 to 100 years, or businesses that are likely to be around for the next 50 to 100 years, at knock-down prices. For patient, long-term investors this was exactly the right time to put capital to work. Together with our global investment managers we bought greedily.
Fast forward to the end of last week and share markets have soared. The recovery means New Zealand and United States shares are down around 11% year-to-date. Well above the low of down almost 32%. NZ Funds’ clients benefitted fully from the global share market recoveries. An indicative KiwiSaver 0-54-year-old client is down only half that of the market.
Markets have recovered, now what?
We are now at a point that because the recovery has been so dramatic in its size and speed, valuations are now at or close to long-term averages. While markets are not expensive, they are no longer cheap like they were at the end of March.
For investors to earn a sizable return from here, share markets will have to see a strong recovery in economic activity. This will drive earnings and thus shares and bonds higher. It is company earnings which will drive share markets higher, not the multiple people are willing to pay.
Market outlook
COVID-19 has pushed the global economy into a recession of historic proportions. As infections spread globally, economic activity has collapsed. The economy working its way out of recession is key to the long-term performance of the share market.
This may take some time as the second-round effects from the slump in private sector income to consumer and business spending is more dramatic than expected.For example, in New Zealand tourism makes up almost 6% of GDP. Our current way of life since the onslaught of COVID-19 makes it incompatible with the almost 4 million tourists that arrived in New Zealand in 2019.
We expect share markets to track sideways within a range of ±10% for the next few months before resuming their upward climb. We believe the huge global and ever-increasing government stimulus prevents the economy slipping into a depression such as in the 1930s.
Portfolio positioning
In this environment the economy must play catch-up with the share market (or vice versa). Following the share market recovery, we hold a balanced allocation of assets between our growth portfolios.
We continue to maintain a strong weight to active managers where returns can be generated by picking winning sectors and shares, rather than passively owning the market. For example, the return outcomes from owning tourism and Air New Zealand versus healthcare and Fisher and Paykel Healthcare is massive.
Finally, we are finding an increasing number of ‘rifle shots’ for our Global Themes Portfolio to take advantage of attractive investment opportunities. One of these investments being an allocation to gold, which stands to benefit from global monetary and fiscal stimulus. We will take the opportunity in next week’s communication to further explore the Global Themes Portfolio.
We remain positive, this is the perfect entry point
Volatility has decreased allowing investors to build up their savings at an attractive and stable entry point. When markets restart their upward climb, those with long-term time horizons will benefit from a share market that will be substantially higher over the next one, three and five years.
Be kind. Stay home. Stay safe. Save lives.
It was touch-and- go whether we could easily return to New Zealand given rumours Hong Kong airport would close due to the virus. We immediately pivoted clients’ portfolios to become moderately defensive.
As we continued to discuss the spread of the virus with our global network of experts, we believed markets were being complacent and struggling to gauge (what was now called) COVID-19’s economic impacts. In 10 March 2020 | Market Update 1, we explained how NZ Funds took steps to mitigate the effect of further financial market volatility and hedged 50% of clients’ share market exposure.
There was no better time to buy shares
We wrote in 20 March 2020 | Market Update 3, that we were entering the third phase of our investment strategy and we were focused on benefiting as share markets rebound. In 27 March 2020 | Market Update 4 we stepped through the extent of the stimulus packages announced by governments throughout the world which confirmed our positive view.
In late March and early April, we had the opportunity to buy extraordinary businesses, some of which have been around for 50 to 100 years, or businesses that are likely to be around for the next 50 to 100 years, at knock-down prices. For patient, long-term investors this was exactly the right time to put capital to work. Together with our global investment managers we bought greedily.
Fast forward to the end of last week and share markets have soared. The recovery means New Zealand and United States shares are down around 11% year-to-date. Well above the low of down almost 32%. NZ Funds’ clients benefitted fully from the global share market recoveries. An indicative KiwiSaver 0-54-year-old client is down only half that of the market.
Markets have recovered, now what?
We are now at a point that because the recovery has been so dramatic in its size and speed, valuations are now at or close to long-term averages. While markets are not expensive, they are no longer cheap like they were at the end of March.
For investors to earn a sizable return from here, share markets will have to see a strong recovery in economic activity. This will drive earnings and thus shares and bonds higher. It is company earnings which will drive share markets higher, not the multiple people are willing to pay.
Market outlook
COVID-19 has pushed the global economy into a recession of historic proportions. As infections spread globally, economic activity has collapsed. The economy working its way out of recession is key to the long-term performance of the share market.
This may take some time as the second-round effects from the slump in private sector income to consumer and business spending is more dramatic than expected.For example, in New Zealand tourism makes up almost 6% of GDP. Our current way of life since the onslaught of COVID-19 makes it incompatible with the almost 4 million tourists that arrived in New Zealand in 2019.
We expect share markets to track sideways within a range of ±10% for the next few months before resuming their upward climb. We believe the huge global and ever-increasing government stimulus prevents the economy slipping into a depression such as in the 1930s.
Portfolio positioning
In this environment the economy must play catch-up with the share market (or vice versa). Following the share market recovery, we hold a balanced allocation of assets between our growth portfolios.
We continue to maintain a strong weight to active managers where returns can be generated by picking winning sectors and shares, rather than passively owning the market. For example, the return outcomes from owning tourism and Air New Zealand versus healthcare and Fisher and Paykel Healthcare is massive.
Finally, we are finding an increasing number of ‘rifle shots’ for our Global Themes Portfolio to take advantage of attractive investment opportunities. One of these investments being an allocation to gold, which stands to benefit from global monetary and fiscal stimulus. We will take the opportunity in next week’s communication to further explore the Global Themes Portfolio.
We remain positive, this is the perfect entry point
Volatility has decreased allowing investors to build up their savings at an attractive and stable entry point. When markets restart their upward climb, those with long-term time horizons will benefit from a share market that will be substantially higher over the next one, three and five years.
Be kind. Stay home. Stay safe. Save lives.
Source: Bureau of Labour Statistics. Bloomberg.
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.
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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