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  • Monthly Review – August 2020

    16th September, 2020
  • New Zealand

    August saw a new Covid-19 outbreak in the community with Auckland going back to level 3 and the rest of NZ to level 2. This negatively impacted economic growth, especially affecting the tourism and hospitality sectors. It is now more likely that more businesses will close permanently and unemployment will rise. There has been an increase in the number of people applying for the Covid-19 Income Relief Payment.

    An unintended consequence of low interest rates and high liquidity in the system is that the gap between the poor and the wealthy is likely to increase. This has already been seen in the property market, with the median house price up 14.8% over the 12 months to July 2020. This disparity is likely to increase with the Reserve Bank widely expected to move to negative wholesale interest rates in April 2021.

    The NZ Share market rose by 3.42% in August. This lagged the global market reflecting the lack of technology companies in the local market. Year to date the NZ share market is down -1.89%.


    In August the Federal Reserve bank signalled that should inflation rise to just above their 2% target, they wouldn’t become concerned, as it had spent the last ten years below this target. This reinforces the view that interest rates will remain low for a long period of time.

    Shares are valued by discounting their future expected earnings using an interest rate. The lower the interest rate, the higher the valuation. Companies which are growing strongly may have smaller near-term earnings but are expected to have larger future earnings. The valuations of these companies increase significantly as interest rates fall. This partly explains why growth companies are benefitting so strongly in the current environment. Companies such as Tesla are expected to make large profits in the future, and these earnings become even more valuable when low interest rates are forecast. This concept is behind the strong performance of the US Nasdaq over the month, rising 11.05% in August, up 38.68% from the start of the year. The Japanese market also performed strongly, fuelled by news that Warren Buffet was buying Japanese trading companies.

    Global share markets continued to recover in May. The MSCI ACWI World Index rose by 4.24% and is now only down by -7.98% in 2020. However returns between various sectors have been disparate, with growth shares, including technology shares, essentially flat, with some having benefitted from the lockdown.

    How does this impact your investments?

    The Income Category returned 1.02% for August, taking the 12 month return to 1.83%. The Income Category had a strong month, driven by long investment grade and high yield CDS positions, and interest rate positions which benefited from a steepening of the yield curve in the US.

    The Inflation Category returned 3.32% for the month, taking the 12 month return to 2.12%. There is currently a growing polarisation among investors – the fear, simultaneously, of both inflationary and deflationary forces in the economy. We have all these deflationary forces developing – unemployment, demand destruction, over capacity, technology. Inflation is often reflective of strong economic demand. NZ Funds has increased the Category’s exposure to cyclical themes to take advantage of an inflationary environment. This includes exposures to small companies in the US and commodities. Exposure has also been increased to the potential for higher long term (30 year) interest rates in the US.

    The Growth Category returned 6.30% for the month, taking the 12 month return to 12.32%. The Growth Category had a strong month, driven by a position in the Nasdaq index and exposure to technology shares through the Category’s active managers. Technology shares have been the major beneficiaries of the ‘stay at home’ economy. These companies also benefitted from lower interest rates.

    Looking forward to what will happen when a vaccine is available, NZ Funds believes a wider range of companies will benefit. Therefore the Category took an exposure to the Russell 2000 index, a US index capturing the performance of smaller capitalisation companies. It is a widely diversified index and ideal for starting to position the Category towards the post-Covid economy.

    Please contact us for the full August 2020 Monthly Review and the latest NZ Funds Insights