Investment Insights -
Half year review
As we cross the 2020 halfway stage, it is an opportune time to step back and take stock of a turbulent and captivating year-to-date in financial markets.
On 20 March, three days out from the lows of the COVID-19-induced market turmoil, we wrote that global share markets had fallen -26.3% year-to-date. United States shares were down -24.9% and Australian and New Zealand shares were down -27.3% and -25.4% respectively. Corporate bonds were also under pressure and commodity prices continued to collapse, with oil trading at prices not seen since 2003 (before turning temporarily negative!).
Financial markets were struggling to gauge the economic impacts of COVID-19. NZ Funds took steps to mitigate the effect of further financial market volatility on clients’ growth assets. We hedged 50% of clients’ share market exposure. We also purchased options to capture gains should an unexpected share market rally occur.
NZ Funds’ clients fared much better than the market in the downturn. The average 45-year old KiwiSaver member was down around -14.0% year-to-date and the average 65-year old KiwiSaver member was estimated to be down only -11.5% year-to-date.
V-shaped recovery – a reality for financial markets
Since then, global shares followed one of history’s worst quarters with one of its best in the second quarter, with global markets soaring 19.2%. Year-to-date, global and New Zealand shares are now down only -3.0% and -7.0% respectively while NZ Funds KiwiSaver growth is down only around 4.2%. While we remain vigilant and monitor multiple variables, there is little reason shares should not continue to do well from here.
Many investors and much of the media do not believe in this share market recovery, with the skepticism coined by United States-based Fisher Investments as "the Pessimism of Disbelief." Most see the abysmal forecasts for economic growth and quarterly earnings and believe shares are disconnected from reality — inflated by government or central bank largesse.
There are indeed uncertainties. When will New Zealand’s border open? Joe Biden or Donald Trump? How will the world stem the steep rise in COVID-19 cases prior to a vaccine? But our longer-term views, discussed in our market updates at end of March, when we started to reinvest, have not changed. Markets do not wait for the all-clear signal.
Share markets are leading indicators, generally looking one to three years out. While a renewed, widespread lockdown could have a severe effect on shares, this scenario seems unlikely. Crucially, nearly every investor is considering this, so the markets have likely factored in a potential COVID-19 recurrence to a large extent already. It is far too early to be certain and we are not suggesting markets are on a pre-set course. However, a sustained share market climb with volatility seems much more likely than another steep downturn.
NZ Funds’ positioning
We remain fully invested within our growth portfolios. The sectors and themes that drove markets higher prior to COVID-19 fell less than broad markets in March and have led markets higher in the upturn.
While remaining fully invested, we also maintain our previously discussed overweight position to technology shares. (The Nasdaq-100 is up 22% so far this year through to 16 July, while the S&P 500 is still down 1%.)
In New Zealand, sustainable dividend-paying shares form the basis of our growth exposure. Events such as the Tiwai Point smelter closing, which has a short-term negative effect on share prices in the ‘gentailer’ sector, provides opportune entry points to increase our long-term exposure to this stable, high quality sector.
Clients maintain a globally diversified mix of stable, income-generating bonds with a cash buffer to ensure adequate liquidity.
Finally, we retain our downside mitigation should markets unexpectedly sell off. At the same time, we maintain a position in gold, a ‘safe haven’ asset. Gold is currently flirting with all time highs, up over 18.0% year-to-date and has generated strong, uncorrelated gains for clients since March.
We concluded with a quote from renowned investor Peter Lynch in 01 May 2020 | Market Update 9, "far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves". Those with a long-term time horizon will benefit from a share market that will be substantially higher over the next one, three and five years.
On 20 March, three days out from the lows of the COVID-19-induced market turmoil, we wrote that global share markets had fallen -26.3% year-to-date. United States shares were down -24.9% and Australian and New Zealand shares were down -27.3% and -25.4% respectively. Corporate bonds were also under pressure and commodity prices continued to collapse, with oil trading at prices not seen since 2003 (before turning temporarily negative!).
Financial markets were struggling to gauge the economic impacts of COVID-19. NZ Funds took steps to mitigate the effect of further financial market volatility on clients’ growth assets. We hedged 50% of clients’ share market exposure. We also purchased options to capture gains should an unexpected share market rally occur.
NZ Funds’ clients fared much better than the market in the downturn. The average 45-year old KiwiSaver member was down around -14.0% year-to-date and the average 65-year old KiwiSaver member was estimated to be down only -11.5% year-to-date.
V-shaped recovery – a reality for financial markets
Since then, global shares followed one of history’s worst quarters with one of its best in the second quarter, with global markets soaring 19.2%. Year-to-date, global and New Zealand shares are now down only -3.0% and -7.0% respectively while NZ Funds KiwiSaver growth is down only around 4.2%. While we remain vigilant and monitor multiple variables, there is little reason shares should not continue to do well from here.
Many investors and much of the media do not believe in this share market recovery, with the skepticism coined by United States-based Fisher Investments as "the Pessimism of Disbelief." Most see the abysmal forecasts for economic growth and quarterly earnings and believe shares are disconnected from reality — inflated by government or central bank largesse.
There are indeed uncertainties. When will New Zealand’s border open? Joe Biden or Donald Trump? How will the world stem the steep rise in COVID-19 cases prior to a vaccine? But our longer-term views, discussed in our market updates at end of March, when we started to reinvest, have not changed. Markets do not wait for the all-clear signal.
Share markets are leading indicators, generally looking one to three years out. While a renewed, widespread lockdown could have a severe effect on shares, this scenario seems unlikely. Crucially, nearly every investor is considering this, so the markets have likely factored in a potential COVID-19 recurrence to a large extent already. It is far too early to be certain and we are not suggesting markets are on a pre-set course. However, a sustained share market climb with volatility seems much more likely than another steep downturn.
NZ Funds’ positioning
We remain fully invested within our growth portfolios. The sectors and themes that drove markets higher prior to COVID-19 fell less than broad markets in March and have led markets higher in the upturn.
While remaining fully invested, we also maintain our previously discussed overweight position to technology shares. (The Nasdaq-100 is up 22% so far this year through to 16 July, while the S&P 500 is still down 1%.)
In New Zealand, sustainable dividend-paying shares form the basis of our growth exposure. Events such as the Tiwai Point smelter closing, which has a short-term negative effect on share prices in the ‘gentailer’ sector, provides opportune entry points to increase our long-term exposure to this stable, high quality sector.
Clients maintain a globally diversified mix of stable, income-generating bonds with a cash buffer to ensure adequate liquidity.
Finally, we retain our downside mitigation should markets unexpectedly sell off. At the same time, we maintain a position in gold, a ‘safe haven’ asset. Gold is currently flirting with all time highs, up over 18.0% year-to-date and has generated strong, uncorrelated gains for clients since March.
We concluded with a quote from renowned investor Peter Lynch in 01 May 2020 | Market Update 9, "far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves". Those with a long-term time horizon will benefit from a share market that will be substantially higher over the next one, three and five years.
Source: Bloomberg, John Hopkins University, NZ Funds research.
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.
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.
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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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