Monday 8 June, 2020
Global Market View
US equity markets continued to rally in May, aided by cautious optimism over various levels of reopening of the economy and easing restrictions, with the S&P 500 bouncing 36% off its March lows, and finishing the month just 10% below its all-time high set in February. New Zealand led the world in moving to our Alert Level 2 in May allowing for a great degree of freedom and increased economic activity. Many other countries also either eased lockdown restrictions / announced plans to reopen their respective economies / borders in some fashion. Alongside this strong equity performance, markets saw much lower volatility with the VIX index (a measure of volatility) decreasing nearly 20% over the month and the wild daily price swings for share markets seen in March and early April absent in May. Despite the relatively rosy picture painted by stocks, economic data for May presented a much bleaker picture. While US manufacturing recorded a small bounce back from April lows, US unemployment cratered by 20.5 million (the April figure that is reported in May), with the unemployment rate increasing from 4.4% to 14.7%. The consumer price index decreased year-on-year from 1.5% to 0.3% and Retail Sales declined 16.4% in May vs. April compared to an expected decrease of 12%. Markets continue to look through these challenging economic numbers focussing on various permutations of a “V” or “U” shaped recovery.
Framing much of the optimism over a potential recovery from coronavirus induced woes is the potential for a vaccine and initial signs of success. Moderna (a large US biotech company) was the most notable example of this, announcing that an early stage human trial for its coronavirus vaccine successfully produced Covid-19 antibodies in participants. The biotech company said a large clinical trial to determine its effectiveness would follow in July. Markets are also taking great comfort that virtually every major biotech/pharmaceutical/university laboratory is working in a reasonably collaborative manner to find a vaccine. Markets were also buoyed by the continued theme of stimulus/support from central banks globally. In Japan, Prime Minister Shinzo Abe announced further stimulus that equates to an incredible 40% of Japan’s GDP to combat the coronavirus slowdown. Notably, China’s central bank in May announced that it will step up counter-cyclical adjustments to support the economy and make monetary policy more flexible to fend off financial risks. Government bond yields have largely digested the raft of rate cuts and stimulus packages and the huge amounts of liquidity being pumped into global fixed income markets have served to stabilise yields which were much steadier in May than in prior months.
Lastly, May brought increased tension in the on/off cold war between China and the United States. While markets did not really trade off of this theme given President Trump backed away from adding additional tariffs, tensions with China spiked when it was announced that The White House may block a government retirement fund from investing in Chinese equities considered a national security risk. President Trump also said he is “looking at” Chinese companies that trade on the NYSE and Nasdaq exchanges but do not follow U.S. accounting rules. Finally, The Trump administration also moved to block shipments of semiconductors to Huawei Technologies from global chipmakers. We expect this theme to intensify in the run-up the US election in November.
by Steffan Berridge, Senior Quantitative Strategist & Nathan Field, Portfolio Manager - Global Thematic
The Kiwi Wealth Growth Fund (Growth PIE) returned 3.76% after tax and fees in May, 0.19% behind the MSCI All Country benchmark. All three equity strategies contributed positively, while alternative assets underperformed equities broadly as markets continued to bounce back.
Global Thematic returns were broadly in line with the benchmark in May, returning 4.07%, ahead of the benchmark by 0.05%. It was a good month for high growth companies, and some of our best performers were digital industry disruptors like online security company Crowdstrike and electronic trading platform Tradeweb. Strong gains were also seen in stocks exposed to the US housing sector such as Home Depot, Techtronic and DR Horton. Defensive themes continued to give back a little ground after their resilience during the sell-off, with stocks like Pepsi and Thomson Reuters weighing on relative performance.
The Global Quantitative fund returned 4.47% in May, 0.45% ahead of the MSCI AC benchmark as markets continued to rally in anticipation of a recovery from the global recession brought on by COVID-19 and in recognition of some extraordinary central bank stimulus. Crude oil was the standout performer with a near 90% bounce in WTI prices, although this did not translate to performance in the Energy sector with Tech and Industrials leading. China moved onto the back foot as tensions rose in Hong Kong.
Our best sector was Discretionary where home improvement (Lowe’s) and outdoor apparel (Deckers) performed strongly, followed closely by eBay which continues to see strong demand for online shopping. Materials also caught an uplift with Axalta Coatings seeing strong demand for paint products. Our worst sector was Communications where a continued rally in Facebook against our underweight dragged. We caught both ends of the online payments market, missing out on a strong PayPal rally but catching the even stronger uplift in its European peer Adyen.
In terms of positioning for Global Thematic, we have further broadened our theme exposures to account for the possibility of a robust recovery in business and consumer spending if the pandemic is effectively controlled.
For Global Quantitative, our top-down positioning targets higher quality sectors more suited to the current crisis like Tech and Healthcare, although a brightening outlook from low levels has seen us increase exposure to cyclicals. 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 Materials and Tech (LafargeHolcim, Microsoft) while trimming Financials and Industrials (Royal Bank of Canada, ASSA ABLOY). Healthcare and Tech remain favoured sectors, while Energy and Financials are out of favour.
by Benjamin Wilton, Fixed Income Analyst
The Kiwi Wealth Fixed Interest Fund (Fixed Interest Fund) returned 0.69% after fees and taxes in May versus its benchmark which returned 0.10%. This outperformance was driven by our exposure to company and semi-government bonds whose spreads tightened significantly relative to New Zealand government bonds. We also had a lower exposure to longer dated bonds which sold off more as interest rates rose at the end of the month.
Share markets and company bonds around the world rallied again in May, continuing to be fuelled by unprecedented monetary and fiscal stimulus from central banks and governments in lockstep with the commencement of efforts to reopen economies following prolonged lockdowns. However, this risk-on sentiment did not translate into the usual selloff in safe-haven government bonds. The yield on the U.S. 10-year government bond remained virtually unchanged since March, stuck in a trading range of 0.60% - 0.70%. This anomaly is likely one of caution that the full economic force of Covid-19 has yet to transpire and that events such as increased bankruptcies and defaults are inevitable. Indeed, we witnessed a few major companies tumble in May, with the global rental car provider, Hertz, and one of the world's largest airlines, LATAM, both filing for bankruptcy. The U.S. Federal Reserve has done an excellent job at fuelling market sentiment with the perception being that the Fed will do “whatever it takes” to support the economy buoying markets. This theme continued in May in a number of conventional (loosening bank capital requirements & announcing that the Main Street Business Lending Program and Municipal Liquidity Facility programs would be operational by the end of May) and unconventional (commencing the purchase of Investment Grade and High Yield bond ETFs to support liquidity) ways. In total, the Federal Reserve’s balance sheet to combat coronavirus increased again in May and is now approaching US$7 trillion.
Back home, the Reserve Bank of New Zealand (RBNZ) followed a similar path. During the Monetary Policy Statement (MPS) released mid-month, Governor Orr expanded the Central Bank's government bond-buying programme from $33 billion to $60 billion. This move was widely expected and indeed needed to smooth the enormous amount of issuance that will result from the Government’s expansive ambitions to counter the impact of coronavirus on the economy outlined in the Budget just a day later. Negative interest rates remain very much on the table, with Governor Orr exhorting banks to prepare for the potential of negative rates during the MPS. Sure-enough immediately following these comments, the yield on the New Zealand 10-year government bond sunk to a record low of 0.59% and the New Zealand Dollar (NZD) fell below 0.60 USD (likely Orr’s real intention). As the month progressed, and the country moved to Level 2 (with a move to Level 1 now looking like a reality much quicker than expected), the market grew increasingly sceptical that the RBNZ would continue to suppress rates so aggressively. The RBNZ duly pumped the breaks in the closing days of May, announcing that it planned to slightly taper its government bond-buying starting 25th May. This caused N.Z. government bond yields to rise (prices down) at months end, with the interest rate on a 10-year government bond finishing up at 0.82%.
We remain unenthused about the value proposition of company bonds, and still prefer to focus on high-quality government and quasi-government bonds, as we believe that these still offer the strongest risk adjusted returns in the current environment. Consequently, we added to positions in LGFA (AA+), Housing New Zealand (AA+) and Australian Government (AA+).
Although being lower risk investments, this is not a set-and-forget market by any means. For example, by taking advantage of the rally in NZ government bonds around the MPS mid-month, and knowing the RBNZ was likely to pump the breaks, we took profit on our purchase of New Zealand government bonds in April and proactively moved onto the Australian curve swapping out longer dated New Zealand government bonds and in to longer dated Australian government bonds. This allowed the Fund to pick up meaningful additional yield and served to protect our downside in the process. Despite the reluctance to add company bonds, the Fixed Income Fund added a small corporate position in May adding to the Fund’s holding in Spark (A-) where we felt the value proposition made sense.