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  • Monthly Review – April 2020

    15th May, 2020
  • New Zealand

    While the NZ economy grow by 1.80% in 2019 the effect of the five-week level 4 lockdown will push the economy into recession. With tourism, manufacturing, hospitality and retail sectors effectively closed for weeks it is expected the NZ economy could experience a fall in economic activity of 15-20% in the first half of 2020. However, the NZ agricultural sector has withstood the global lockdown better than feared. In March NZ exported $5.8 billion of goods, up 3.80% on March 2019, and the highest monthly value ever recorded. The increase in exports reflects a good kiwifruit harvest and higher prices for milk powder and meat. NZ is also likely to eliminate the virus given the effectiveness of lockdown and unique control we can exercise over our borders. Outside of tourism and education, business is expected to get back to some form of normality soon.

    Following international markets the NZ share market rose by 8.71% in April. A possible explanation is that market participants are seeing the recession as a pause in activity and are expecting a quick rebound. Also, with interest at all-time lows there are few other investment opportunities.

    NZ interest rates reached an all-time low in April with a Government 10-year bond yield of 0.88% at month end. The NZ dollar rose against the US dollar and was trading at US$0.6126 at the end of the month. However, it declined against the Australian dollar closing the month at A$0.9358, down from A$0.9754 at the start of the month.


    It remains uncertain how international economies will exit from their COVID-19 imposed lockdowns. Unlike NZ and Australia most countries may have to adopt a policy of containment rather than elimination. The effects of COVID-19 will be felt throughout the year and possibly into 2021.

    Given the speed at which the global economy went into recession and the fiscal and monetary stimulus that followed, it is difficult to draw any parallels between this recession and previous ones. In a typical economic cycle the share market will start to decline six months before an economy enters a recession. Share markets will also bottom out and start recovering six months before the economy exits a recession. This may be why there is currently a disconnect between what is happening in the share market and what we are hearing from the real economy. The big unknown is how long this will last and what the new normal will look like. The share market seems to be suggesting a reasonably quick rebound with limited long-term damage.

    In April global share markets recovered more than half the losses they experienced in March, with the Global MsCI ACWI World Index rising 10.31%. In the US the S&P500 rose 12.82% and the tech-heavy Nasdaq100 was up 15.19%. Emerging markets also experienced a strong month. Global interest rates remained low.

    How does this impact your investments?

    The Income category returned 4.22% for the month, taking the 12-month return to 1.18%. After the worst month since the Global Financial Crisis, April was one of the best on record for many asset classes including corporate bonds. The key factor was the announcement by the Federal Reserve that they would purchase not only investment grade bonds but also bonds recently downgraded from investment grade to high yield. This removed the risk that sound companies could default on their obligations due to pandemic related liquidity issues. The impact of COVID-19 is clearly greater in some sectors with industries such as oil and gas, airlines and car rental agencies over-represented in the credit indices.

    The Inflation Category returned 5.02% for the month, taking the 12-month return to -2.56%. Inflation pressures brought about by the government stimulus were a risk during the GFC but inflation never materialised. Much of the stimulus provided in 2009 was absorbed by banks and finance companies after asset values collapsed and banks required recapitalising. Today banks are well capitalised so the government stimulus may take longer to be absorbed and may result in a higher level of inflation over the coming decade. Inflationary effects are most likely to appear after the virus is truly beaten. The crisis could weaken structural forces weighing on demand. More generous post-pandemic safety nets, or progressive taxes enacted to pay down large government debts, could redirect income towards spenders, creating inflationary pressure. While inflation is not certain to return it is a possibility so NZ Funds retains investments within the Category that perform well in an inflationary environment, including positions in gold as well as inflation-protected US government bonds.

    The Growth Category returned 6.49% for the month, taking the 12-month return to -4.20%. One of the external managers used by Core Growth portfolio is US based Emerson Point. Their view is that the Covid-19 lockdown is hastening trends that were already occurring and would just cement these trends. We see this with newer companies looking to disrupt incumbents. Workers have had to adopt remote working more quickly than expected. Consumers (including the elderly) have ad to adopt online purchasing and streaming services. After lockdown these skills will remain and newer innovations are likely to be rapidly adopted. This again highlights that there will be winners and losers out of COVID-19. NZ Funds will be actively looking for opportunities in this environment.