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  • Monthly Review – May 2020

    18th June, 2020
  • New Zealand

    While the NZ economy is slowly returning to some form of normality, with the borders closed it will be at least six to 12 months (best case scenario) for economic activity to return to pre-Covid-19 levels. Tourism and Education are expected to be the last sectors to recover. The RBNZ released their six-monthly monetary policy statement in May. As expected they maintained the OCR at 0.25% and announced additional purchases of government bonds. At present the RBNZ believes maintaining liquidity in the banking system and keeping long-term interest rates low will be sufficient to support the recovery. However a negative OCR is still a possibility.

    The NZ Share market rose by 3.36% in May. NZ interest rates remained at all-time lows with Government 10 year bond trading at a yield of 0.82%. The NZ dollar rose against the US dollar and was trading at US$0.6205 at the end of the month.


    The Federal Reserve bank of New York suggests US economic growth has contracted by 8.9% this quarter. Other models suggest an even greater contraction. However data from those states that have exited the lockdown early suggests a reasonably quick rebound. The big unknown is how fast the unemployment rate will fall. It is likely to peak at over 18% this month, the highest it has been since the 1930s depression. However, this includes staff who have been temporarily laid off and are expected to be rehired once the lockdown eases. The US experience remains a proxy for the rest of the world with Europe and the UK likely to experience similar outcomes.

    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 1.28% for May, taking the 12 month return to 1.43%. The income portfolios participated in the strong recovery in credit markets. The US Federal Reserve’s decision to purchase credit EFTs has bolstered demand for bonds issued by high quality corporates and the more leveraged high yield companies. The combination of investor demand and low interest rates has encouraged large corporates to issue a record number of new bonds. In NZ the demand for credit has also been strong, however there has been no issuance of substance as any demand for new funding has been met through new bank debt or issuing new shares.

    The Inflation Category returned 0.31% for the month, taking the 12 month return to -2.30%. the current financial turmoil is raising many questions. It could be many months before we start seeing a recovery in the ‘real’ economy. Central banks are likely to keep interest rates close to zero for an extended period. Furthermore, governments may have to provide more rounds of stimulus to support households and businesses before we get back on a stronger growth track. While the absolute level of inflation may be modest, say 2-3%, an environment of low interest rates will have a significant wealth impact for retired investors. NZ Funds is preparing clients’ portfolios for a decade of increasing prices, retaining clients’ long-term exposure to share markets across the Category and at the same time adding to the gold position and inflation-protected US government bonds.

    The Growth Category returned 0.46% for the month, taking the 12 month return to 0.10%. The Growth Portfolios participated in the share market recovery over the month, however, as noted above, individual share performance has been disparate with some companies being severely hurt by the global lockdown while others, especially technology companies, have actually benefited.

    NZ Funds had three external managers within the Growth Category. Three of these – MFS, Suvretta and Emerson Point – have performed strongly due to their technology bias. These managers account for over 80% of the allocation to external managers. The fourth manager, LSV, has a value bias and invests in companies which look cheap. This investment style has performed poorly this year and LSV has lagged the global market. NZ Funds has therefore decided to terminate its mandate with LSV. In due course they will look to appoint a new external manager.

    Please contact us for the full May 2020 Monthly Review