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New Zealand is easing back to (a new) normal as almost two months of strict lockdown comes to an end. Lockdown restrictions were among the strictest in the world meaning the economy is badly affected. However, the measures appear to have worked.
So too will NZ Funds’ weekly communications normalise. Now known as NZ Funds’ Investment Insights, we will share with you a variety of perspectives on financial markets, financial advice and developments at NZ Funds.
New Zealand’s economic setup
New Zealand was fortunate to have a strong economy and fiscal position coming into this current crisis. It is this, together with the success in which New Zealand has so far been able to combat the health effects of the virus, that we remain positive on New Zealand shares. We have increased clients’ exposure to New Zealand as we progressed through lockdown.
Prior to the COVID-19 pandemic, New Zealand’s real GDP growth in the year to December 2019 was higher than many of our international peers. Unemployment at 4% was historically low and net debt was below 20% of GDP. This compares to the United Kingdom which had net debt above 75%, the United States 90%, and many countries, well over 100% prior to the need to respond to the virus.
This strong fiscal position, set up by Bill English and Michael Cullen, meant New Zealand was better placed than many other countries to use its balance sheet to cushion the blow of COVID-19 on the economy.
“The rainy day has arrived” - Grant Robertson
New Zealand will not go unscathed. New Zealand’s real GDP growth rate is forecast to decline from 2.8% in the year ending June 2019 to -4.6% in the year ending June 2020, driven by a quarterly decline in GDP of over 20% in the June 2020 quarter.
Unemployment is forecast to increase significantly, rising to 8.3% in the year ending June 2020, before peaking at 9.8% in September 2020 and then recovering thereafter.
New Zealand’s V-shaped recovery?
New Zealand remains a possibility of having a V-shaped recovery. As discussed in 01 May 2020 | COVID-19 Market update 9 , a V-shaped recovery represents the most bullish outlook. The economy was on a solid footing before the COVID-19 shutdown, and a V-shaped rebound would consist of a rapid return to the same level of output once social distancing restrictions are removed.
While a more gradual recovery is more likely, growth in the second half of 2020 could make up much of the shortfall of the first half. Although some industries and sectors will take longer to recover, they will not be left to collapse. The rapid rescue of Air New Zealand is one such example.
Will we see negative interest rates in New Zealand?
To provide continued support and achieve its dual mandate of price stability and maximum sustainable employment, the Reserve Bank of New Zealand (RBNZ) is developing its use of alternative monetary policy instruments. This includes the RBNZ moving to negative interest rates.
Negative interest rates are unlikely to feed through to the retail market. We do not believe that banks will want to charge their customers for depositing money. However, term deposit and mortgage rates will continue to decline.
Positive for New Zealand shares
With the potential for negative interest rates, the dividend yields offered by New Zealand shares makes them more attractive than ever. NZ Funds’ dividend-focused approach to selecting shares is an ideal strategy for the current environment. In the NZ Funds Dividend and Growth Portfolio, we have purchased a well-diversified mix of New Zealand companies whose dividends we believe can be sustained through an economic downturn.
As well as strong dividends, for several years now we have been saying valuations are stretched, but that they could remain so for long periods of time. Today, we assess most companies to be trading at considerably cheaper prices. At these prices, our job is now to buy greedily on your behalf. We expect the purchases we make today to deliver significant capital gains over the next two to three years.
So too will NZ Funds’ weekly communications normalise. Now known as NZ Funds’ Investment Insights, we will share with you a variety of perspectives on financial markets, financial advice and developments at NZ Funds.
New Zealand’s economic setup
New Zealand was fortunate to have a strong economy and fiscal position coming into this current crisis. It is this, together with the success in which New Zealand has so far been able to combat the health effects of the virus, that we remain positive on New Zealand shares. We have increased clients’ exposure to New Zealand as we progressed through lockdown.
Prior to the COVID-19 pandemic, New Zealand’s real GDP growth in the year to December 2019 was higher than many of our international peers. Unemployment at 4% was historically low and net debt was below 20% of GDP. This compares to the United Kingdom which had net debt above 75%, the United States 90%, and many countries, well over 100% prior to the need to respond to the virus.
This strong fiscal position, set up by Bill English and Michael Cullen, meant New Zealand was better placed than many other countries to use its balance sheet to cushion the blow of COVID-19 on the economy.
“The rainy day has arrived” - Grant Robertson
New Zealand will not go unscathed. New Zealand’s real GDP growth rate is forecast to decline from 2.8% in the year ending June 2019 to -4.6% in the year ending June 2020, driven by a quarterly decline in GDP of over 20% in the June 2020 quarter.
Unemployment is forecast to increase significantly, rising to 8.3% in the year ending June 2020, before peaking at 9.8% in September 2020 and then recovering thereafter.
New Zealand’s V-shaped recovery?
New Zealand remains a possibility of having a V-shaped recovery. As discussed in 01 May 2020 | COVID-19 Market update 9 , a V-shaped recovery represents the most bullish outlook. The economy was on a solid footing before the COVID-19 shutdown, and a V-shaped rebound would consist of a rapid return to the same level of output once social distancing restrictions are removed.
While a more gradual recovery is more likely, growth in the second half of 2020 could make up much of the shortfall of the first half. Although some industries and sectors will take longer to recover, they will not be left to collapse. The rapid rescue of Air New Zealand is one such example.
Will we see negative interest rates in New Zealand?
To provide continued support and achieve its dual mandate of price stability and maximum sustainable employment, the Reserve Bank of New Zealand (RBNZ) is developing its use of alternative monetary policy instruments. This includes the RBNZ moving to negative interest rates.
Negative interest rates are unlikely to feed through to the retail market. We do not believe that banks will want to charge their customers for depositing money. However, term deposit and mortgage rates will continue to decline.
Positive for New Zealand shares
With the potential for negative interest rates, the dividend yields offered by New Zealand shares makes them more attractive than ever. NZ Funds’ dividend-focused approach to selecting shares is an ideal strategy for the current environment. In the NZ Funds Dividend and Growth Portfolio, we have purchased a well-diversified mix of New Zealand companies whose dividends we believe can be sustained through an economic downturn.
As well as strong dividends, for several years now we have been saying valuations are stretched, but that they could remain so for long periods of time. Today, we assess most companies to be trading at considerably cheaper prices. At these prices, our job is now to buy greedily on your behalf. We expect the purchases we make today to deliver significant capital gains over the next two to three years.
Source: RBNZ, Bloomberg. Dividend yield series shows the dividend yield received from the New Zealand share market over the previous year. Data used NZSE40 Index (1999 - 2001), NZX 50 Portfolio Index (2001 onwards). For more information please contact NZ Funds.
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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