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  • Monthly Review – December 2020

    2nd February, 2021
  • New Zealand Economic Update

    The New Zealand economy, measured by GDP, rebounded by a record 14.0% in the September quarter, to be 0.4% up on the same quarter in 2019. On an annual basis, real GDP was 2.2% down for the same period. Although the contraction in the June quarter GDP was the sharpest on record, it was less severe than expected, suggesting that the effects of alert level restrictions on economic activity were smaller than previously assumed.

    The current account returned to deficit as imports recovered, and the New Zealand Treasury’s Half Year Economic and Fiscal Update pointed to an improving economic outlook. House prices continue to increase, supporting consumer confidence, and dairy prices remained buoyant. Manufacturing indicators remain strong, although services activity slowed.

    One of the most talked about topics over summer is the rise in house prices. The November REINZ House Price Index was up 15.3% on a year ago and up 3.0% over the month. Auckland house prices rose by 16.2% over the year and prices in the rest of the country rose by 14.5%. House prices continue to be supported by a combination of limited inventory, strong demand and accommodative monetary policy.

    Despite continued low inventory levels, total house sales in November 2020 year to date were 6.6% higher than the same period in 2019. The housing market has been stronger than expected in recent months with no signs of slowing yet, which creates upside risk to economic forecasts but also increased risks around Government and Reserve Bank intervention.

    The New Zealand share market returned 5.57% for the month and 15.43% for the year ¹. The big sector performers during the year were the large-cap Utilities (benefiting as central banks slashed interest rates) and Health Care. Domestic bond returns were negative during the month as stronger economic data and sentiment lifted local interest rates which also meant the New Zealand dollar continued its appreciation against the United States dollar.

    International Economic Update

    The rollout of the first highly effective vaccines against the coronavirus bolstered sentiment throughout December. Shares rose early in the month after the United States Food and Drug Administration (FDA) released data confirming that the Pfizer-BioNTech vaccine was 95% effective while resulting in few severe adverse reactions.

    Sentiment appeared to waver at times, as the brightening outlook for an eventual end to the pandemic came up against a grim set of current milestones. A predicted post-Thanksgiving surge in COVID-19 cases sent hospitalisations to new highs in early December, while daily United States deaths from the virus crossed 3,000 for the first time.

    Improving prospects for another round of federal coronavirus relief also supported stock prices. Shares recorded their best daily gain on December 15 after Senate Majority Leader Mitch McConnell announced that the Republican-controlled Senate would do a deal on a new stimulus bill. On December 21, both the House of Representatives and the Senate passed a compromise US$900 billion relief package.

    The major global share indices reached record highs in December to close out the year. The small-cap Russell 2000 Index led the gains in December, up 8.65% for the month and finishing the year up 19.93%. The technology-heavy Nasdaq 100 Index recorded its best annual return since 2009, up 48.88% for the year. The MSCI All Countries World Index rose by 14.21% in 2020.

    How does this impact your investments?

    The Income Category returned 0.37% for the month of December, taking the twelve month return to 2.16%.

    The Income Category enjoyed a positive end to the year as it benefited from general market optimism post the vaccine announcements. Despite this optimism, longer term interest rates remained subdued in December and traded within a very tight range. We have used this period to add to the Category's short interest rate positions as we continue to believe that long-term interest rates need to move higher given the fiscal spending that will occur in 2021.

    Interest rates are barely above zero and corporate credit spreads are close to record tight levels. In combination, this makes a traditional approach of passively buying and holding corporate bonds an unappealing strategy. Not only is this approach unlikely to generate much in the way of a return but the after-inflation return may well be negative – meaning that investors will be going backwards.

    This is an environment where active management is required and a different set of return generators are needed. Looking forward we expect the primary return drivers for the Category to be the active management of interest rates and currency exposures.

    The Inflation Category returned 4.22% for the month of December, taking the twelve month return to 8.96%.

    A key driver of the Inflation Category is the NZ Funds-managed Absolute Return portfolio which returned 3.74% in December and is up 13.76% for the year. Performance in December was driven across multiple strategies including its flagship merger arbitrage positions.

    A new merger arbitrage position in United Kingdom-based security services provider G4S provided the majority of merger arbitrage outperformance. Takeovers and mergers of listed companies have accelerated in recent months making the current environment for merger arbitrage the most favourable it has been in recent years. Exposure to this strategy is currently increasing to capitalise on this opportunity.

    The Growth Category returned 8.74% for the month of December, taking the twelve month return to 26.14%.

    The Growth Category had a strong end to the year. What was particularly pleasing was that returns were generated across our key investment themes including our overweight to shares, securities that benefit from rising long-term interest rates and increasing commodity prices. Bitcoin was also a strong performer as we approached the end of the year. Furthermore, our external investment partners across the globe all had strong performance.

    We wrote in our 2H 2020 investment report that crisis results in change, and change should be viewed as an opportunity to make money and not as a threat. This certainly was the case as we close out a strong year of returns in 2020.

    Where to from here? Should we take profit? Should we sit on the sidelines after a strong year? The answer is No! With help from our international partners, we continue to identify a number of asset classes which we expect will materially increase in value over the coming years, allowing us to build on our strong returns in 2020 using our three-step process of Survive, Adapt and Prosper.