Monday 7 September, 2020
Global Market View
Equity markets continued their steady climb with many global markets reaching all-time highs. The currency hedged MSCI All Country index returned 5.7% for the month. Economic data overseas showed signs of improvement, although much of it driven by massive government support.
US markets were buoyed by signs that the latest cycle of Covid-19 numbers may be peaking and is looking past the threat of any worsening, as the US heads into winter and the flu season rolls around. Some of the positive market sentiment came on the back of growing optimism around a vaccine, although the efficacy and practicalities of distribution remain very much uncertain.
Economic data in the US exceeded expectations, with the housing market benefiting from record low mortgage rates and employment numbers gradually improving. Democrats and Republicans remain far apart on approving the next round of fiscal stimulus. The stalemate was exacerbated when President Trump issued an Executive Order in an attempt to circumvent Congress. The US market continues to rally despite the political gridlock, with the S&P 500 posting its best August since 1986, up 7.0%. Equities were driven higher by the soaring value of tech-related companies, as well as a very accommodative interest rate environment.
In late August at the Jackson Hole Economic Symposium, the US Federal Reserve Chair Jerome Powell doubled down on the Fed’s dovish position. The Fed Chair announced a shift away from pre-emptively raising interest rates to combat higher expected inflation. This move would allow the Fed to let inflation run moderately above 2% for a period of time, thus signalling that interest rates would stay low for the foreseeable future. Powell also stated they would factor in the level of employment and not take steps to cool the labour market “unless there is clear evidence of inflationary pressure”.
New Zealand equity markets rebounded from pressure brought about by the level 3 lockdown of Auckland. The local share market also battled through numerous shutdowns as a result of cyber-attacks on the NZX website to finish at an all-time high on 28 August, before losing some ground on concerns over the strengthening NZD. The NZD strengthened over the month following an initial dip as the RBNZ boosted the existing quantitative easing program from NZ$60 billion to NZ$100 billion and indicated that more preparation was in progress for negative interest rates.
by Steffan Berridge, Head of Quantitative Strategy & Nathan Field, Portfolio Manager - Global Thematic
The Kiwi Wealth Growth Fund (Growth PIE) returned 4.28% after tax and fees in August, 0.68% behind the MSCI All Country benchmark. The Global Thematic and Global Quantitative strategies contributed negatively to relative performance this month, while Core Global outperformed. The Kiwi dollar strengthened against the US greenback further which was a headwind for returns in foreign currency.
Global Thematic was behind the benchmark in August although the absolute return was still a healthy 3.86%. Defensive themes such as snack foods and essential utilities dragged on performance relative to benchmark as the market rushed towards high flying stocks, where we are growing more cautious. Our best performing themes were athleisure and US home construction which both benefitted from optimism around consumer spending.
The Global Quantitative fund returned 3.87% in August, 0.76% behind the MSCI AC benchmark in yet another big month for large cap growth stocks. The market rally is still largely driven by TINA (There Is No Alternative to equities), as central banks reaffirmed their commitment to keep interest rates low. However, some aspects of the market point to lower quality gains, particularly the amount of retail money entering the market through online platforms, the positive impact of two high profile stock splits (Tesla, Apple) and the narrowness of the market leadership. Energy was our best sector for the month with our underweight to the sector and a good month for Canadian infrastructure company Keyera proving beneficial. However, this was outweighed by underperformance in the Technology and Discretionary sectors where we did not sufficiently capture the narrow list of names that outperformed for the month (particularly Salesforce.com and Tesla). Our Asian Technology holdings also gave back some of their recent strong gains (MediaTek, Samsung).
In Global Thematic we are maintaining a defensive bias as we are increasingly wary of herd mentality driving some of the market’s leading stocks. As a result, we have reduced our weighting to recent outperformers in the technology and consumer discretionary sectors. We may lag the market in big return month’s like August, but we believe preserving the healthy gains already made this year is of paramount importance given the many uncertainties facing financial markets over coming months.
For Global Quantitative, our top-down positioning targets higher quality sectors more suited to the current environment like Technology and increasingly Industrials. Stock selection favours companies with attractive metrics across earnings quality, capital efficiency, valuations, sentiment and sustainability. Over the month, we’ve increased our allocation to Technology (Visa, Mastercard, Trend Micro) while trimming Financials (Bank of America, QBE Insurance). Discretionary, Industrials, Technology and Healthcare are in favour, while Energy and Financials remain out of favour.
by Greg Hayton, Head of Fixed Interest
The Kiwi Wealth Fixed Interest Fund (Fixed Interest PIE) returned 0.56% after fees and taxes in August slightly outperforming its benchmark. The outperformance can mostly be attributed to corporate and semi government bonds spreads (extra yield a non-government issuer pays versus a government bond) tightening relative to NZ Government Bonds over the month.
The RBNZ’s release of their monetary policy statement on August 12th was the main event last month, by that it had the largest impact on the New Zealand bond market and subsequently our performance. The RBNZ’s Monetary Policy Statement was much more dovish than the market was expecting. The RBNZ stated “there is downside risk to our baseline economic scenario” citing in the statement the long-term concerns around tourism and migration. As a result of this forecast, they firstly announced that their QE bond buy-back programme known as LSAP (Large Scale Asset Purchases) for government bonds would be increased to $100 billion from $60 billion and they would increase the percentage limit of outstanding government bonds they can buy to 60% from 50% by June 2022. The RBNZ also talked up the prospect of taking the Official Cash Rate (OCR) to a negative interest rate next year coupled with commencing a Funding for Lending Programme for commercial banks. This facility would allow the RBNZ to lend to banks at the OCR (or thereabouts), which would provide cheap funds and allow banks to make cheaper loans (mortgages etc) to their customers. All of this means interest rates are going to be lower for longer and risks to further OCR rate cuts remain. It is clear from the RBNZ’s statement that they are going to err on the side of caution, and they will not be afraid to use more tools to meet their dual inflation and employment mandate. It is also interesting to note that the decision to up their QE programme was not influenced by the outbreak of COVID-19 in Auckland. The letter from the Minister of Finance approving the increase to 60% on behalf of the Crown was dated August 6th, before the latest outbreak was known.
It is fair to say the NZ economy has held up well post the level 4 lockdown, performing much better than what most economists predicted. Areas such as primary industries where commodity prices have held up and the housing market, which has benefitted from lower interest rates have exceeded economist’s expectations. Concerns still exist however, as economists worry that the unemployment rate has been artificially held down by the wage subsidy scheme and that we could still see an unemployment rate of around 10%, as the effects of the scheme wear off. It seems that hospitality and tourism jobs, which generally pay a lower wage and have a higher proportion of young workers are going to be the most affected by the COVID-19 recession.
In global news the annual Federal Reserve monetary policy symposium was held. Chair of the Federal Reserve, Jerome Powell stated that the Fed was now adapting their policy to allow inflation to run at a higher rate than previously stated before they would look to tighten monetary policy. This statement caused long term global interest rates to move higher, as all things being equal this would increase the probability that inflation will run at a higher rate in the future. The impact on the New Zealand Government Bond market was rather muted however, as the RBNZs policy of buying NZ Government Bonds across all maturities kept longer dated bond yields suppressed.
We continued to focus on high quality credits over August, as we continue to be very selective about the types of names and companies we want to own. We added to Transpower (AA-), Local Government Authority bonds (LGFA) (AA+), Rentenbank (AAA), International Finance Corporation (IFC) (AAA) and New Zealand Government bonds (AA+).
We increased the average maturity within the fund over the month by about a quarter of a year, as it became increasingly clear that the RBNZ was going to keep interest rates very low for a longer period. From their actions above to not only indicate that they are seriously looking to drop the Official Cash Rate (OCR) into negative territory but to also couple that with a major augmentation of their LSAP programme meant that the probability that interest rates were going to be even lower over the near term was amplified. We have the most conviction at the moment that short to intermediate term interest rates (out to 7 years) will remain low and have therefore over weighted the portfolio to these maturities.