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  • Monthly Review – March 2020

    12th April, 2020
  • New Zealand

    Markets have been severely impacted by the global spread of the COVID-19 virus. There is little doubt that New Zealand will experience its largest recession in the second quarter of 2020, as a direct result of the lockdown imposed to stop the spread of the virus. Economists are predicting economic activity to fall between 15-20% for the quarter, before slowly improving. Unemployment is also expected to rise to around 10%. The agricultural sector, however, is functioning close to normal which should see New Zealand recover relatively quickly once lockdown is removed. NZ shares declined by 16.74% in March with tourism and retail companies experiencing the largest falls. Interest rates were reasonably steady over the month. The 10 year government bond yield was 1.08% at month end. However the NZ dollar fell from US$0.6246 to US$0.5942.


    As with the outlook for NZ, global economic activity is expected to decline sharply in the second quarter of 2020 and then slowly recover. However, the shape of the recovery is less certain given most countries have experienced significant community transmission of COVID-19 and are unable to fully close their borders. Recovery could be dependent on either a vaccine being developed or the virus dying out. Global unemployment will also rise, with the US claiming to already have around 16 million or 10% of the labour force unemployed.

    Governments and central banks have announced the largest stimulus packages in modern history (US$2.25 trillion in the US!). Economists are predicting further rounds of stimulus packages to come. Interest rates are likely to remain low with governments running large fiscal deficits. Economic indicators in China are slowly starting to show some improvement.

    Global share markets declined sharply over March, with most indexes having fallen between 12 – 16%. The Australian share market declined 20.65%.

    Global interest rates declined with US 10 year bonds falling from 1.15% to 0.67%. The Official Cash Rates in most of the developed world are now at 0.25% or less with negative interest rates in Europe and Japan.

    How does this impact your investments?

    The Income Category had a challenging month returning -9.85%, taking the 12 month return to -2.88%. The suddenness of the economic stop triggered a massive grab for cash by both investors and businesses. This caused strains across all areas of the fixed income markets, including the usually highly liquid assets like government bonds, forcing prices lower. Looking forward, yields across the income category have risen dramatically to around 4%. NZ Funds expects the Portfolios to outperform bank investments in an environment of zero cash rates. The portfolios also have high cash levels so there is good scope for this money to be put to work at attractive levels.

    The Inflation Category returned -10.41% for the month of January, taking the 12 month return to -5.58%. At its low in mid March the NZ market was down 34.3%, but has recovered significantly since then. The NZ shares held in the Inflation Category have been far more resilient than the general market. This is due to the fact that the top six holdings have faced minimal disruption from Covid-19. Telecommunications companies Chorus and Spark have enjoyed strong demand. Meridian Energy has also had higher residential demand. Both A2 Milk and Fisher & Paykel Healthcare have experienced strong international demand and benefited from a weaker NZ Dollar.

    The Growth Category returned -9.06% for the month of March, taking the 12 month returns to -7.53%. NZ Funds’ downside mitigation strategies were used over the month and were successful in reducing the decline that the Portfolios experienced. These downside mitigation strategies include an active mandate run by Universa, a US based manager. Universa aims to provide a very positive payoff should markets fall sharply over a calendar month. This worked well over March providing a 4.71% uplift to Core Growth and a 4.81% uplift for Global Equity Growth. In addition, NZ Funds can adjust the share exposure within the portfolios through equity futures; highly liquid instruments. After initially reducing the Portfolios’ exposure to growth assets in February, NZ funds subsequently increased their exposure mid March. This meant the Portfolios only experienced a portion of the down market but were able to fully participate in the market rebound. NZ Funds took an active position in the US dollar over the month. Initially the NZ dollar weakened and the exposure to US dollars was beneficial to the Portfolios. However, this exposure to the US dollar was subsequently reduced and meant NZ Funds were able to lock in the currency gains.

    Please contact us for the full March 2020 Monthly Review