Local and international markets have marked time in recent weeks as investors wait to see how the coronavirus outbreak will develop and what its ultimate impact will be. On the plus side, with supportive economic policies that have been put in place and anti-COVID-19 measures like lockdowns and distancing, it is plausible that we are at or near the low point for the global economic cycle. On the downside, there is no certainty in what happens next, and even countries like New Zealand, which has been effective in controlling COVID-19, remain hostage to recurring outbreaks in areas that have not been managed well. Although uncertainty remains high, the best view is that the New Zealand economy will recover from the September quarter onwards. But even if everything goes as planned, it is likely to be late 2021 or early 2022 before the economy gets back to a pre-COVID-19 level of business activity.
New Zealand Cash & Fixed Interest
Short-term interest rates remain very low, as the Reserve Bank has kept the official cash rate, or OCR, at 0.25%, and 90-day bills are yielding 0.27%. Long-term interest rates have fallen further, and the 10-year government-bond yield is now only 0.65%. The kiwi dollar has been weak year to date, particularly against the U.S. dollar (negative 10.9%) and is down 7.7% in overall trade-weighted value.
It is very likely that short-term interest rates will remain at these very low levels until well into next year. The Reserve Bank has committed to a 0.25% OCR “until early 2021,” and there is even a prospect that it could be lowered into negative territory, which the bank has indicated remains a further policy option.
Property & Infrastructure
Current conditions have been very challenging for listed New Zealand property. The S&P/NZX All Real Estate Index year to date is down by 19.2% in capital value (18.5% including dividends) and has performed significantly worse than the overall share market’s capital decline of 7.5%.
It has been the same story in Australia, where the S&P/ ASX 200 A-REITs Index has also taken a beating in both absolute and relative terms. It has recorded a capital loss of 28.2% compared with the S&P/ASX200’s 19.1%.
Global property has also done very badly. Year to date the FTSE EPRA/NAREIT Global Index in U.S. dollars is down 31.0% in capital value, significantly worse than the 14.8% capital loss for the MSCI World Index.
Global listed infrastructure has been weak: year to date the S&P Global Infrastructure Index in U.S. dollars has suffered a capital loss of 27.1% and delivered a net loss (including taxed dividends) of 26.5%. Hedged into New Zealand dollars, the net loss was a slightly lower 25.3%.
Australasian Equities
New Zealand shares have mirrored the world trend, partially recovering in the first half of April from March’s COVID-19 low point, but treading water in more recent weeks as investors await the eventual impact of the pandemic. The scale of the earlier weakness, however, means that year to date the S&P/NZX50 Index is still down 7.5% in capital value. In risky times the big names have fared best; the NZ10 Index is only marginally lower ( 0.3%) whereas the small-caps index is down by 21.1%.
Australian shares are also down year to date, with the S&P/ASX200 Index down 19.1% in capital value and down 18.1% in total return.
In New Zealand the very worst of the immediate COVID-19 impact may be behind us, as lockdowns ease and business activity starts to recover, but business conditions remain very difficult. The outlook for Australia is very similar, with the latest business surveys picking up from the shocked levels they sank to in March but remaining in very weak condition. The outlook will be difficult for some time.
International Fixed Interest
Bonds, as an overall asset class, have continued to protect capital through the pandemic’s volatility.
As in New Zealand, central banks everywhere are on maximum policy-support settings. Their economies require very stimulatory monetary policies to help recover from the impact of COVID-19 and inflation--which was typically too low in the developed world even before the pandemic--will also need an extended period of easy monetary conditions to get pushed back up to where central banks would prefer it to be. We are likely to see an extended period of low short-term and longer-term interest rates.
International Equities
Following their sharp sell-off in February and March, world shares had regained roughly half the loss by the middle of April. Over the past month, however, shares have essentially gone sideways--for now, investors appear to be waiting to see how COVID-19 will play out.
Despite the April recovery, the scale of the earlier plunge means that all the major global share indexes are still well down year to date. The MSCI World Index of developed-economy share markets is down 14.8% in U.S. dollars. The outcome would have been significantly worse (a loss of 21.7%) without the relatively strong performance of the U.S. markets, where the S&P 500 is down by a relatively modest 11.4% and the Nasdaq, remarkably, has eked out a marginal 0.5% gain. Japan (Nikkei down 15.3%) and Europe (FTSE Eurofirst300 down 21.0%) were weak, with notably large falls in the U.K. (FTSE 100 down 23.1%) and in France (CAC down 28.4%).
Emerging markets have been weaker than their developed counterparts, and the MSCI Emerging Markets Index in U.S. dollars is down 19.2%. The big BRIC—Brazil, Russia, India, China—members are down by 16.8%, with only China holding up relatively well (Shanghai Composite down only 6.0%) and the others recording large losses.
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