Investment market update (for the quarter ended 31 August, 2021)
The majority of global share markets have continued to climb higher, with many sitting at or near record highs. Markets have been driven higher by a combination of:
Companies generally delivering better-than-expected earnings results benefiting from a combination of improving economic activity and significant cost savings.
Central banks and governments remaining committed to “loose” policy settings, including ultra-low interest rates, which continue to underpin very healthy growth in economic activity, and support demand for higher risk-return investments such as stocks.
Vaccine roll-outs in Europe and the United States boosting hopes that rising cases of the Covid-19 delta variant will not lead to further lockdowns. Vaccines have proved effective in substantially reducing the proportion of people who catch the virus getting seriously ill.
New Zealand market bounces despite Covid lockdowns
Some may be surprised the strong performance has come at a time when we’ve been hit with the first Covid-19 community outbreak in six months, and the whole country has been thrown back into lockdown. Lockdowns will impact economically exposed sectors and companies.
The good news for investors, however, is the New Zealand market is dominated by defensive companies in sectors like healthcare, utilities, telecommunications, and consumer staples. The earnings of these companies are less affected by the economic environment.
The silver lining of the outbreak is that it’s been the wake-up call for many New Zealanders to get vaccinated. We no longer hold the inauspicious title of being the least vaccinated country in the Organisation for Economic Co-operation and Development (OECD). This time round, New Zealand had no real choice around how to respond to the Covid-19 outbreak — zero tolerance with strict lockdowns. Widespread vaccinations are the only way to provide countries with broader choices about how to manage Covid-19 in the future.
Interest rate rises are coming
The Covid outbreak caused an about-turn decision by The Reserve Bank of New Zealand (RBNZ) to hold off raising interest rates. But this is likely to be only temporary.
The New Zealand economy is facing pent-up demand and capacity constraints — the housing shortage being the most obvious example — from the tidal wave of migrants over the last eight years. In recent years, that same migration kept a lid on wages.
But now, with borders shut, capacity pressures are biting and inflation risks are rising.
Furthermore, unlike other countries, New Zealanders have been breaking out the credit cards. Much of our strong economy is being funded by rising household debt for which we’ll eventually face a cost. The market is pricing that the first rate hike will most likely come at the next RBNZ meeting on 6 October.
This time round, New Zealand had no real choice around how to respond to the Covid-19 outbreak — zero tolerance with strict lockdowns.
Invest locally and globally
Over the past decade or so a home market bias to New Zealand would have been very beneficial. Our high dividend yielding market has been one of the top performers globally. A large part of this return has been from investors’ willingness to pay a higher price for the income generated by businesses in sectors such as utilities, telecommunications, and property. We believe the shift in the direction of interest rates means this benefit is now likely at an end.
That isn’t to say you should throw the baby out with the bathwater. There are still high-quality companies in New Zealand we are happy to remain invested in. But, it does mean having adequate diversification (always a mainstay of any investment plan) across markets and sectors may prove even more important than usual. As always, whether regarding adequate diversification or any other questions you may have, your Forsyth Barr Investment Adviser is available to discuss your investment plans at any time.
This column is general in nature and does not take any of your personal circumstances into account. For personalised financial advice, contact Forsyth Barr for an overview of the services we can provide.