Friday 9 April, 2021
Global Market View
Global equity markets rose 3.5% in March (as measured by the NZD-hedged MSCI ACWI index), shrugging off concerns about rising inflation and higher interest rates, and instead focusing on the positive stories of ongoing vaccine rollouts and massive levels of US fiscal stimulus.
President Biden used a thin majority in Congress to full effect in March, passing a US$1.9 trillion stimulus package to help re-ignite the pandemic-ravaged economy. Included in the bill is a USD $1,400 one-off payment for most Americans – money that policymakers hope will flow through to dining out, shopping, and other business sectors still struggling from multiple lockdowns.
It remains to be seen whether US consumers are in a spending mood, but equity markets have clearly taken the view that the Biden boost is just what the economy needs. It’s a common theme in financial markets at present – with good news being seized upon as another reason to buy risk assets, and bad news dismissed as trifling or temporary. For example, the threats of higher corporate taxes in the US and a potential fourth wave of infections in Europe have had little impact on investor sentiment. Even the dramatic collapse of hedge fund Archegos Capital failed to fuel market fears, with the negative impact restricted to a small cluster of stocks (none of which had a material impact on Kiwi Wealth funds).
In New Zealand, the conversation was rather surlier and more inward-looking, with the housing market again taking centre stage. Labour’s property tax changes seemed to catch everybody off guard, with both the Kiwi dollar and local interest rates falling sharply post announcement. The country’s leisurely vaccine rollout also came under scrutiny, with concerns that New Zealand could fall behind in a post-COVID global recovery.
However, while the 2.7% gain in domestic equities lagged the global rally, it’s worth noting New Zealand’s outperformance of the world index over the past three years - so a little bit of give-back, is not a catastrophe. Likewise, the 3.3% monthly fall in the NZD/USD exchange rate to ~0.70 should be seen in the context of its 17.3% rally from ~0.60 a year ago.
Looking back at the blistering rally in global share markets since the depths of the pandemic sell-off in March last year, it’s worth noting that almost nobody predicted we’d be 16% above pre-pandemic levels within twelve months. But almost nobody anticipated the unprecedented monetary response, the speedy success of multiple vaccines, and a Democratic sweep in the US elections – factors critical to the share market rally.
Where equity markets finish for the year will likely be determined by similarly unpredictable events. Regardless, we still see plenty of investment opportunities that offer potential for long term gains. Time and time again, staying the course on an investment plan rather than trying to pick market inflection points has proven to be a winning long-term strategy.
by Nathan Field, Portfolio Manager - Global Thematic and Steffan Berridge, Head of Quantitative Strategy.
The Kiwi Wealth Growth Fund returned 5.4% after tax and fees in March, 0.5% ahead of the MSCI All Country benchmark which returned 4.9%. All three of the underlying equity strategies performed well over the month contributing positively to relative performance. The Kiwi dollar got exceptionally weaker last month which helped boost our foreign currency returns.
Global Thematic finished just ahead of its global shares benchmark in a very strong month for equity market returns. Outperforming stocks were a diverse mix of snack food companies (Pepsi, Nestle), US industrials (Teledyne, Eaton Corp), and homebuilding related stocks (Home Depot, Lowes, Pulte). The drags on the portfolio tended to be stock specific, such as Eli Lilly, which gave an underwhelming update on a key Alzheimer’s drug, and Taiwan Semiconductor, which came under pressure following Intel’s announcement it would boost US manufacturing capacity.
Global Quantitative finished the month up 8.4% and was 1.8% ahead of the ACWI benchmark as vaccine optimism and a monster US stimulus package added support to the economy, spurring a pickup in inflation and a rise in treasury yields keeping growth stocks on the back foot. The month ended with the Suez Canal blocked, sending freight rates sky-high and raising questions about the fragility of global supply lines.
Our top sectors were Consumer Discretionary, with US home retailer Williams-Sonoma a top performer posting strong results, and Technology, where Infosys rallied on their expansion in Canada. These were complemented by a handy underweight in Shopify which was down sharply for the month as rising yields hampered growth stock valuations. Our worst sector was Communications where our Baidu holding, and underweight Facebook faced headwinds.
In Global Thematic, we added to our positions in medical supplies and services stocks in anticipation of a return to more normal patient flows through the health system, while we trimmed our bank positions following a big run-up in share prices over the past six months.
In Global Quantitative, our top-down positioning targets higher quality companies and sectors seen as more suited to the current environment. Stock selection favours companies with attractive metrics across earnings quality, capital efficiency, valuations, sentiment, and sustainability. Over the month, we increased allocation to Communications stocks (Activision Blizzard, Telcom Italia) and Energy (Baker Hughes, Williams), and reduced Technology (Microchip Technology, Cisco). Technology and Materials remain favoured sectors while Energy and Utilities are our largest underweights.
by Diana Gordon, Head of Fixed Interest.
The Kiwi Wealth Fixed Interest Fund returned 0.2% after fees and taxes in March - underperforming its benchmark which returned 0.5%. This was almost wholly a function of a smaller average maturity than the fund’s benchmark. New Zealand interest rates declined from February’s highs in March although the effects faded towards month end.
General themes continued in March: strong US economic numbers due to solid vaccine rollouts and re-openings (in contrast to a lacklustre but accelerating vaccine rollout in Europe), and inflation pushing up in the US towards the important 2% level, further aided by the prospect of a USD $2.3 trillion infrastructure package. Coming on the heels of the passage of an earlier $1.9 trillion stimulus, this kept the momentum going for higher long term interest rates - with the rate on a US 10-year government bond rising 34 basis points from 1.40% to 1.74% over the month. The US Federal Reserve (Fed) has been quite sanguine on inflation. It is still its view – and also that of the market - that inflation spikes will be transitory, perhaps 1 or maybe 2 quarters long. It is our view that inflation will remain a bit higher for longer, and we have positioned the fund accordingly.
After perhaps overshooting in February (the worst month ever for NZ government bonds), there was a bit of a snap back in March with the interest rate on a 10-year government bond declining 8 basis points from to 1.91% to 1.83% over the month. Two things led our market to buck the global trend. Firstly, the wind has come a little out of the sails of the New Zealand economy, largely due to the lack of foreign tourists in peak season. But the main event was the government’s announcement of housing curbs. The two changes - eliminating mortgage interest deductibility on investment properties, and extending the Bright Line test on taxation of non-home residential property to 10 years (a de facto capital gains tax) were powerful shots across the bows of property investors and took the market rather by surprise. With the government making it plain that it would act further (e.g. rent caps) should house price inflation remain rampant, this willingness to chill an important part of the economy also cooled expectations of when the Reserve Bank would hike the Official Cash Rate (OCR) from the current 0.25%. At the end of February, there was a 100% chance of a hike baked in by July 2022 - but by the end of March, that number was 60% (ironically bringing
down the cost of mortgages). We think that it’s unlikely that a potential fall in house prices would be enough to materially affect the economy, but we do see the Reserve Bank holding the OCR lower for longer despite global inflationary pressures.
March saw us focus squarely on shorter maturity bonds. We added Netflix (BB+), Twitter (BB+) and lease equipment giant United Rentals (BB) as well as hard disk drive behemoth Western Digital (BB+). Credit spreads (the extra interest premium you get from owning a bond issued by a company rather than a government) aren’t all that attractive due to strong expectations for global growth. However, we do see value in rising stars that will likely trade very well if they have their credit ratings upgraded. Closer to home, we added new issues of Transpower (AA) and quasi-government IBRD (AAA).
We continued to reduce our government bond exposure selling out of the expensive New Zealand Government (AAA) 2028 dated bonds and taking profits on New South Wales State (AA+) bonds ahead of higher expected inflation numbers. We take the view that there will be a time to buy longer bonds again but that will likely be in our spring. The fixed interest market in New Zealand is a tale of two markets. Short maturities (< 5 years) are anchored to the New Zealand OCR while longer maturity (> 5 years) bonds take their lead from the interest rate on the 10-year US Treasury bond. Right now, there is the same giddy elation in the US that we felt in May last
year. The Fed is crystal clear that it will leave its overnight rate unchanged at 0.125% unless inflation really spikes over several quarters (a short-term spike which is near-inevitable with oil prices up 25%+ since the beginning of the year).
Will the interest rate on the US 10-year Treasury bond (and hence long maturity NZ bonds) continue to climb as inflation spikes? If so, at what point would the Fed step in to push down 10-year interest rates? It’s still too early to tell - so we are keeping a conservative tack when it comes to average maturities. The big question will be what happens, like in NZ, when the infrastructure stimulus sugar rush begins to fade. That’s a bridge we will cross when we come to it.