While forecasters are typically running with a range of scenarios, most agree that their baseline or best-guess scenario is for a serious setback to world trade and gross domestic product this year, followed by a recovery next year. The shape and speed of the recovery remains very uncertain, however, with fund managers inclined to believe it may be a more gradual affair rather than a rapid return to normality. In the interim, equity markets will continue to be confronted by generally downbeat economic and financial news, even as more countries succeed in bending the curve of new infections. On the plus side, bonds have preserved capital and prices are likely to be supported by ongoing central bank buying. In New Zealand, the relaxation of the lockdown is good news, but there is still a long way to go before the full extent of COVID-19’s impact becomes apparent.
New Zealand Cash & Fixed Interest
Like everywhere else, monetary policy has been used vigorously to help offset the impact of COVID-19. The official cash rate, or OCR, is 0.25%, 90-day bank bills are yielding only 0.39%, and the 10-year government-bond yield is only 0.92%. A lower exchange rate has also helped the overall easing in monetary conditions. The New Zealand dollar is down 7.3% in overall value since the start of the year, with especially large falls against the two main currencies regarded as relative safe havens--it is down 11.6% against the yen and down 10.7% against the U.S. dollar.
Currently there is a very strong consensus that the OCR will be kept at 0.25% over the next year. Long-term interest rates are also likely to remain unusually low for an extended period.
Property & Infrastructure
Listed New Zealand property has had a difficult time through the COVID-19 period. The S&P/NZX All Real Estate Index year to date has lost 18.1% in capital value, substantially underperforming the 7.0% capital loss from the overall share market.
The A-REITs have also significantly underperformed the wider market, with the S&P/ASX 200 A-REITs Index suffering a capital loss of 25.2% compared with the S&P/ ASX 200 Index’s 17.9%.
Global property has also been out of favour. The FTSE EPRA/NAREIT Global Index in U.S. dollars has lost 25.6% in capital value, worse than the 14.5% capital loss for the MSCI World Index. Losses were similar across most of the main regions, ranging from the Asia Pacific’s 22.2% loss through to the U.K.’s 29.2% loss.
Global listed infrastructure has behaved very like global property--year to date the S&P Global Infrastructure Index in U.S. dollars has suffered a capital loss of 23.5%.
Australasian Equities
New Zealand shares have followed the global COVID-19 pattern, dropping sharply from mid-February to late March, before staging a partial recovery in more recent weeks. Year to date the S&P/NZX50 Index is down 7.0% in capital value and down 6.2% in total return terms.
Australian shares are also weaker, with the S&P/ASX 200 Index down 17.9% in capital value and down 16.9% in total returns. The financials, which will be exposed to business defaults and the costs of debt relief, have been particularly weak, and are down 28.0%.
The latest state of business sentiment, which now reflects the full impact of COVID-19 and the tight level-four lockdown is, unsurprisingly, dire. The recent rally in local equity prices likely says more about a rethink of the original level of panic rather than anything more substantive about the business outlook. In particular, the apparent success of the stringent lockdown has been reassuring. But business conditions are going to be challenging--even on the more upbeat scenarios--into 2021, and inevitably some businesses with higher levels of debt and fixed costs are not going to make it.
International Fixed Interest
Bonds have done their portfolio-protection job year to date. The Bloomberg Barclays Global Aggregate Index in U.S. dollars has eked out a small 0.7% gain, protecting capital as equity markets slumped. The outlook for monetary policy everywhere is essentially the same: both short-term and longer-term interest rates will be kept at extremely low levels for an extended period of time--at least until the COVID-19 outbreak is controlled and some normality has returned. But, in all probability, it will take longer.
International Equities
World share prices fall very sharply between mid-February and late March. From its Feb. 12 peak, the MSCI World Index of developed markets in U.S. dollars dropped by over a third (34.2%) before bottoming out on March 23. Since then the index has rallied, and is up by 25.9% from its low, but the earlier loss still dominates the year-to-date outcome, with investors suffering a 14.5% capital loss.
Relatively resilient U.S. markets have helped to cushion the loss: The S&P500 is down by only 11.0%, and the Nasdaq by only 3.6%. Other major markets have fared markedly worse. In Europe, the FTSEurofirst 300 Index is down by 19.4%, with Germany (down 19.8%), France (24.7%), and the U.K. (down 23.3%) all suffering large setbacks.
Emerging markets have suffered worse again, in an environment where investors have shunned the riskier end of an asset class. The MSCI Emerging Markets Index is down 19.9% in U.S. dollars, with the key BRIC economies--Brazil, Russia, India, and China--down 16.6%.
Even though the COVID-19 outbreak appears to be peaking in several countries as health measures are in place to help bend the curve of new infections, forecasters are still very unclear how the world economy will behave in coming months.
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