• NELSON: +64 (3) 545-8029
  • 0800 200 012 (in NZ only)
  • BLENHEIM: +64 (3) 578-1921
  • Monthly Review – June 2020

    15th July, 2020
  • New Zealand

    The NZ economy appears to be recovering quickly from the level 4 lockdown. However, any recovery is dependent on there being no further community transmission of the COVID-19 virus. Statistics NZ data shows the economy is back to around 90% of its normal level. Banking transaction data shows spending rebounding strongly in May and June, with an increased level of domestic spending due to the inability to travel overseas.

    Despite these positive early signs there is concern that unemployment will rise and, after the initial bounce back, the economy could slip back into recession. The latest NZIER business confidence survey revealed 19% of businesses had reduced staff numbers in the June quarter with a further 28% expecting to do so over the next quarter.

    The RBNZ issued their six weekly monetary policy update, noting the country had exited the lockdown earlier than expected and the fiscal stimulus was larger than expected, but nevertheless, they remained prepared to provide additional monetary stimulus if required.

    The NZ Share market rose by 3.09% in June, taking its lead from global share markets. In the six months to the end of June the NZ share market is down just 7.50%. The top-performing shares over the month were Metlifecare (+22.67%) and Fisher & Paykel Healthcare (+18.75%) which has been a standout performer over the crisis.

    Global

    COVID-19 continues to have a significant impact on the daily lives of most of the developed world. While a number of countries have relaxed restrictions, most are still following some form of social isolating. Despite this business confidence is slowly improving. This suggests the global economy can bounce back reasonably quickly once the virus is under control. Data suggests that the crisis will create changes in peoples’ behaviour. Working from home continues to grow in popularity as does online shopping and the use of remote conferencing software. This presents a risk to companies focussed towards business travel, CBD shopping and office property.

    Growth shares and technology companies continue to perform strongly, while asset-rich and value companies continue to disappoint. The technology heavy Nasdaq index continued to perform strongly, up 6.29% (up 16.30% ytd), while the S&P500 index was only up 1.99%. The US share markets with their higher exposure to tech companies have been among the strongest performers. European shares were up 6.48% in June (but down 11.97% since the beginning of the year).

    How does this impact your investments?

    The Income Category returned 1.13% for June, taking the 12 month return to 1.44%. More than three months have passed since the US Federal Reserve made its first announcement on March 23 to support the credit markets. This has had a positive impact with the spreads of many bonds having returned towards pre-COVID levels. In the first half of the year there has been a record issuance of new bonds in the US – US$381 billion. This is larger than the full-year issuance for both 2018 and 2019. In NZ no new corporate bonds have been issued – instead, new funding requirements are being met through additional bank borrowing.

    The Inflation Category returned 1.02% for the month, taking the 12 month return to -4.00%. Since the global pandemic took hold the world has changed dramatically and inflation is an issue that is likely to return. While in the short term deflation is just as likely, the government stimulus packages mean there is now an unprecedented amount of new cash in the financial system. With more money available and potentially fewer goods, prices will typically rise.

    Gold has excelled as a safe haven and category diversifier, rallying around 20% since its low in early March while stocks tumbled. In the current environment, gold – as a store of value – will continue to play a prominent role in the category. For retired investors or those requiring a fixed income, inflation can be negative, especially as interest rates remain low. Having gold in your portfolio helps mitigate this inflation risk. It adds diversification and helps to smooth returns during uncertain times.

    The Growth Category returned 1.95% for the month, taking the 12 month return to -2.69%. The Growth Portfolios participated in the share market recovery over the month. Part of the exposure within the Growth Portfolios is achieved through purchasing equity futures. These futures are extremely liquid and very cost-effective. The futures are used, in combination with the external managers, to gain access to the US, European, British, Japanese and Australian share markets. The US exposure had been through the S&P 500 future. However NZ Funds moved this exposure to the Nasdaq 100 index in April given the better outlook for growth and technology shares. The top five companies in the Nasdaq are Apple, Microsoft, Amazon, Facebook and Alphabet (the holding company of Google). All have gone from strength to strength over lockdown.

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