Outlook for Investment Markets
The coronavirus continues to dominate the outlook. Here the virus remains well-contained, but overseas there has been a resurgence in cases across a wide range of countries. The latest analysis is that the global economy will still recover in 2021, and there have indeed been some promising developments, notably China’s resumption of robust economic growth, but risks remain tilted to the downside. Strong fiscal and monetary policy support will remain necessary: The world’s central banks will be keeping interest rates very low for some time and the Reserve Bank of New Zealand will likely add even more supportive monetary policy. New Zealand also looks as if it is headed for a better 2021, but it is early days in the recovery from the worst of the COVID-19 hit and investors will not know the true scale of the pickup for a while yet. In current risky conditions, extensive diversification and other defensive portfolio insurance remain a high priority.
New Zealand Cash & Fixed Interest
Short-term interest rates remain very low, with the Reserve Bank of New Zealand continuing to hold the official cash rate, or OCR, at 0.25%. The 90-day bank bill yield remains just under 0.3%. Longer-term yields have also shown little change in recent weeks, with the 10-year government bond yield trading in a 0.5-0.6% range (currently 0.54%). The kiwi dollar has also shown little change in terms of its headline U.S. cross rate, continuing to trade around the $0.66-$0.67 mark (currently 66.3 cents). In overall trade-weighted value the kiwi dollar has not fully recovered from its sharp fall in the early days of the COVID-19 outbreak and is down 3.3% year to date.
New Zealand Property
Listed property everywhere has had a difficult year affected by COVID-19, and while New Zealand’s REITs are no exception, they have fared better than either the A-REITs or global property. Year to date the S&P/NZX All Real Estate Index is all square in terms of capital value and has delivered a small total return, including dividends, of 2.2%. The total return has been well behind the 7.8% achieved by the wider share market.
Australian & International Property
The A-REITs have had a hard time of it in both absolute and relative terms. The S&P/ASX 200 A-REITs Index year to date has recorded a capital loss of 14.5% and an overall loss, including dividends, of 12.5%. The corresponding figures for the wider share market are a capital loss of 6.8% and an overall loss of 4.5%.
Global listed property has fared equally badly. The FTSE EPRA/NAREIT Global Index in U.S. dollars has registered an overall loss including dividends of 19.0%, very substantially adrift of the 4.4% total return from the MSCI World Index. All major regions have shared in the pain, although the eurozone has not fared as badly as most (a loss of 12.2%). The U.K. has done a good deal worse with a loss of 26.8%.
Global Infrastructure
Global listed infrastructure remains one of the sectors worst affected by COVID-19. Year to date the S&P Global Infrastructure Index in U.S. dollars is down 17.7% in capital value and in net return terms (including the taxed value of dividends) has lost 15.4%. The net return has been a bit poorer again after currency hedging, with a loss of 17.4% in New Zealand dollar terms.
Investors have evidently remained unimpressed by the prospects for infrastructure, for a variety of reasons: share price momentum has been down the growth end of the equity spectrum, favouring the likes of the tech giants against defensive options like utilities; operating conditions at some lockdown-affected infrastructural assets, notably airports, have been dire; and the infrastructure supporting the oil and gas industries has been hard-hit by the sharp fall in energy prices year to date.
Australasian Equities
New Zealand shares have had the same volatile year as other equity markets but have ended up ahead for the year to date, with the S&P/NZX 50 Index up by 5.7% in capital value, and up by 7.8%, including the income from dividends. The big caps in the S&P/NZX 10 Index remain the strongest contributor, with a 10.8% capital gain, helped by a big gain from Fisher & Paykel Healthcare.
Australian shares have been doing well since the end of September--since then the S&P/ASX200 Index is up 7.1%--but the recent strength has not been enough to make up the losses experienced earlier in the year, and year to date the index is still down by 6.8% in capital value and down by 4.5% including dividend income. Despite a stellar 43.5% capital gain for the IT sector, overall performance continued to suffer from the weak financials (down 17.3%) and the industrials (down 15.5%). The miners are modestly up (4.7%) for the year.
International Fixed Interest
Even though bond yields had already fallen to very low levels, and the likelihood of further capital gains looked low, bonds have nonetheless kicked on and generated a useful contribution to portfolio performance. Year to date the Bloomberg Barclays Global Aggregate Index in U.S. dollars is up 6.3%. The higher credit quality end of the asset class continues to perform best, with especially large returns from long-dated U.S. Treasury bonds, but the riskier world of global “high-yield” bonds has returned only 0.7%.
There is no change to the outlook: central banks pretty much everywhere will be aiming to keep short-term policy rates and long-term bond yields at least as low as they are now (and could even drive them lower again) and are likely to stay on that supportive monetary policy course for an extended period.
International Equities
Although world share prices have eased back over the past week, investors are slightly ahead year to date, with the MSCI World Index of developed markets in U.S. dollars up by 2.5%. And there was a further small contribution for New Zealand investors from the kiwi dollar’s modest 1.6% depreciation against the greenback. As has been the case all year, the outcome has been heavily reliant on the U.S. market, where the S&P 500 is up 6.1% and the Nasdaq is up 27.9%. Without the U.S. contribution, the MSCI World Index is down 7.1%. European shares have been especially weak, with the FTSEurofirst 300 down 12.7% (in euros). The U.K. market has struggled with both COVID-19 and Brexit, and the FTSE 100 is down 22.0% (in sterling).
Emerging markets are slightly up year to date, with the MSCI Emerging Markets up 1.1% in U.S. dollars. The core BRIC (Brazil, Russia, India, China) components are up 5.1%, entirely due to stronger Chinese shares, which have outweighed a small loss in India and large losses in Brazil and Russia.
There have been some constructive developments in the global economy. World economic activity has picked up strongly from the COVID-19 setback, and the latest (September) J.P. Morgan Global Composite Index (which adds up a very wide range of national business surveys) showed that the world economy continued to grow.
It has also been helpful that China has emerged from the other side of its COVID-19 outbreak and is providing significant support to world economic activity. China’s GDP in September was 4.9% up on a year earlier, and year to date Chinese GDP is up 0.7%.
The latest (October) forecasts from the IMF expect ongoing growth. The IMF reckons that world output will have shrunk by 4.4% in 2020 but will recover by 5.2% in 2021. Its latest assessment is that 2020 has turned out a bit better than initially thought, but the scale of the bounceback is also not quite as large.
See the Full MorningStar Economic update here.
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