The coronavirus continues to be the prime influence on the investment outlook. Unfortunately, the latest developments have been largely on the downside: Besides the local outbreak in Auckland, the daily number of global new cases continues to increase. At the moment, the consensus view among forecasters remains that 2021 will see a recovery in both the global and domestic economies, which could see the sectors previously most affected by COVID-19 lockdowns regain some lost ground, but risks remain tilted to the downside. Portfolio protection through extensive diversification and more defensive sectoral choices will have to remain a priority.
New Zealand Cash & Fixed Interest
The Reserve Bank of New Zealand, or RBNZ, kept the official cash rate, or OCR, at 0.25% at its Aug. 12 Monetary Policy Statement, and other short-term interest rates consequently remain very low, with the 90-day bank bill yield at 0.3%. At the statement, the bank also increased the scale of its bond buying programme (‘Large Scale Asset Purchases’, or LSAPs), which aims to keep bond yields low as well, and the 10-year government-bond yield remains close to 0.8%. The kiwi dollar has reversed course: After rising in May, June, and much of July, it has weakened in overall value more recently and since July 23 has dropped by 2.2%. For the year to date, it is down 3.2%.
At a minimum, the OCR will be kept at its current 0.25% until well into next year, in line with the RBNZ’s forward guidance.
Property & Infrastructure
Listed property continues to struggle. The S&P / NZX All Real Estate Index for the year to date is down 10.9% in capital value (down 9.6% including the income from dividends) and has substantially underperformed the wider sharemarket. The sector will lose a constituent on Aug. 21 with the delisting of diversified manager Augusta Property, following its takeover by ASX-listed Centuria Capital. Given the latest Auckland COVID-19 outbreak, listed property looks likely to remain out of favour unless or until there is clearer permanent progress against the virus.
The Australian-REITs have also faced tough market conditions. The S&P / ASX 200 A-REITs Index for the year to date has lost 19.2% in capital value and delivered a total overall loss including dividends of 17.4%, significantly worse than the 7.4% overall loss from the wider Australian sharemarket.
Global listed property has produced similarly poor results. For the year to date, the FTSE EPRA / NAREIT Global Index in U.S. dollars has delivered a total overall loss including dividends of 17.6%, again well shy of shares in general: The MSCI World in U.S. dollars delivered a small positive total return of 2.8%. Losses were generally widespread, although the eurozone did a bit better than most (a loss of 8.7%) and the U.K. rather worse than most (down 22.6%).
Global listed infrastructure has suffered from the same lockdown issues as global property and has similarly done badly for the year to date. The S&P Global Infrastructure index in U.S. dollars is down 15.7% in capital value and down 14.3% in net overall return, including taxed dividends. Hedged back into New Zealand dollars, the net return loss was 16.4%.
Australasian Equities
After showing little net movement in July, New Zealand share prices have weakened more recently in the wake of new COVID-19 outbreaks in both New Zealand and Australia: From its recent peak on Aug. 4, the S&P / NZX50 Index has dropped 2.3% in capital value. For the year to date, the index is down slightly (by 1.1%) in capital value and effectively all square including dividends (a total return of 0.1%). Investors remain heavily focused on the top 10 stocks (up 7.2%), while the mid-caps (down 13.0%) and small caps (down 8.5%) remain out of favour.
COVID-19 has also weighed on Australian shares, with the Victorian resurgence leading to bouts of weakness throughout July. While share prices have improved in August to date, the recent modest recovery still leaves the S&P / ASX 200 Index well down for the year, with a capital loss of 8.9% (reduced to a total return loss of 7.4% after including dividend income). The IT sector (up 18.0%) and consumer staples (up 11.0%) have done well, and the miners (up 9.0%) have benefited from higher world commodity prices, particularly gold and iron ore, but they have been outweighed by large falls for the industrials (‑19.4%), the A-REITs (‑19.2% as noted earlier), and the financials (‑18.5%).
International Fixed Interest
Bonds have continued to provide useful portfolio insurance through recent market volatility. For the year to date, the Bloomberg Barclays Global Aggregate Index in U.S. dollars is up 5.6%. For most of the year, the overall outcome has been heavily reliant on higher U.S. bond prices, but the gap has narrowed in recent weeks: Ex the U.S., the index is up a useful 4.5%. As one would expect in unsettled markets, the riskier end of the asset class has underperformed, with global high-yield (low credit-quality) bonds up by only 0.6%.
International Equities
Rather remarkably, despite the crushing COVID-19 setback to global business activity, world shares are slightly ahead for the year, with the MSCI World index of developed economies up for the year to date by 1.3% in U.S. dollars. New Zealand-based investors have made a further small gain thanks to the 2.4% depreciation of the New Zealand dollar against the U.S. dollar.
The outcome has, however, been heavily dependent on one market (the U.S.) and within that market on one sector (IT). Ex the U.S., the MSCI World Index is down by an intuitively more realistic 6.1%. Within the U.S., the S&P500 Communications Services and Information technology Index is up 19.4%, but ex those sectors the S&P500 is down by 3.2%. The importance of the tech companies is also shown by the remarkable performance of the Nasdaq index, which is up 23.1% for the year to date.
Other developed economies have been considerably weaker. Japan has been relatively resilient, with the Nikkei index down by only 1.7%, but European shares have generally been weak. While German shares are down only slightly (DAX down only 1.9%), overall European equities are down by 11.0% (on the basis of the FTSE Eurofirst 300 Index). The U.K. has been especially weak: GDP dropped by 20.4% in the June quarter, a larger fall than in most other developed markets, and the FTSE 100 index is down 18.0%.
The emerging markets are slightly down for the year to date, with the MSCI Emerging Markets Index down 1.7% in U.S. dollars. The key Brazil, Russia, India and China markets (the ‘BRIC’ group), however, were up slightly, by 0.6%. The marginal gain was entirely due to stronger Chinese shares, offset by large losses in the other three BRIC markets.
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