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Investment Update November 2020

Robert Murray

Written by Robert Murray

Monday 7 December, 2020

Global Market View

November was a great month for stock markets (though not the NZ bond market!), in particular for more economically sensitive areas of the US stock market “value” stocks. The rotation from growth to value stocks benefited shares of companies that are likely to gain in value from an Investment Update December 2020 economic recovery as opposed to those that benefited from the stay-at-home trend. Energy stocks were up markedly with higher oil prices. Financials, industrials and materials also rose. This saw the Dow Jones Industrials Index surge to all-time highs crossing the 30,000 level for the first time in history before finishing the month slightly below this peak (but still recording an 11.8% gain for its best monthly performance since January 1987). The Eurozone, UK, Asia and Japan also saw significant increases in their respective indices as global equities enjoyed a purple patch.

The major catalyst driving the value rotation has been the incredibly positive vaccine news that was released in November, with 3 different potential vaccines releasing results, and efficacy numbers as high as 95%. In turn, this positive data helped alleviate fears that society will have to learn to live with the virus on a more permanent basis and offers the hope of a much quicker return to normal than had been anticipated only a month ago. That said, many countries will continue to be ravaged by COVID-19 through the Northern Hemisphere winter but there is now real hope of a way forward. The other major
catalyst behind the moves was the US election, where, while it took a bit longer than normal to get a final result, the heavily contested scenario that had been a source of concern for investors didn’t arise, with the General Services Administration having now moved to begin the formal transition process to President-Elect Biden.

The shock financial markets news in New Zealand in November was the public faceoff between the Minister of Finance and the Governor of the RBNZ over the RBNZ’s perceived role (via accommodative monetary policy) in fuelling the current housing market frenzy. The public nature of the discussions certainly spurred market participants into action as the probability of the OCR turning negative was taken off the table. This saw the yield on the 10-year NZ government bond increase by 32 bps for the month.

Offshore, Government bond yields were also volatile during the month. The US 10-year Treasury yield was 3 bps lower at 0.84%, but saw large daily changes around the US election and news on vaccines. Corporate bonds performed well, with global investment grade producing a total return of 2.1% and high yield 4.1% (Source: ICE BofAML, local currency total returns).

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Growth Performance  |  Growth Positioning  |  Fixed Interest Performance  |  Fixed Interest Positioning

Growth

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by Nathan Field, Portfolio Manager - Global Thematic and Steffan Berridge, Head of Quantitative Strategy

Performance

The Kiwi Wealth Growth Fund (Growth PIE) returned 5.82% after tax and fees in November, 2.28% behind the MSCI All Country benchmark which returned 8.09%. The Quantitative and Thematic equity strategies contributed negatively to relative performance this month, but Core Global provided some upside. In addition, the alternative assets outperformed cash, but underperformed equities. The Kiwi dollar strengthened against the US greenback last month, which was a headwind for foreign currency returns.

Global Thematic produced positive returns but lagged the surge in global equities in November. Our bias towards quality companies that served us well through the first ten months on 2020 quickly became a headwind when the vaccine news broke, as investors flocked back to cyclical industries like energy, airlines, and metals and mining. The vaccine-fuelled rotation meant that our worst performers were defensive stocks like Pepsi, Nestle and Procter & Gamble – all of which remain important longterm holdings, but a risk-hungry environment will see these names struggle to keep up. While our strategy might have lagged the benchmark in November, we are still sitting on healthy year-to-date outperformance, effectively smoothing the ride for investors.

The Global Quantitative fund underpreformed as breakthrough vaccine results provided a massive boost to down-and-out segments of the market. The Pfizer/BioNTech announcement on 9 November that preliminary trial results showed 90% effectiveness took the market by surprise and led to the biggest daily momentum crash and junk rally on record. The biggest sector beneficiary of the announcement was Energy, which spiked 12% higher on the day as the market priced in a 2021 demand rebound.

Our lag to benchmark was evident across a number of sectors where the lockdown/recovery theme was at play and had created a wide junk/quality split matching the K-shaped recovery narrative. Our worst sectors were Financials and Technology where our underweight to Banks (JP Morgan, Citigroup) and focus on Tech businesses that were proving robust to lockdown conditions (NortonLifeLock, Nintendo) suffered relative to benchmark. Our best sectors were underweights in Real Estate and Utilities, and our best position was Macy’s, which ripped 42% higher for the month.

Positioning

In Global Thematic, the positive vaccine news has prompted us to alter our positioning in Global Thematic, and we have added to bombed-out travel-related stocks (Boeing, Marriot Hotels, Hyatt Hotels) in anticipation of a rebound in leisure travel spending. The recent rise in US rates and steepening of the yield curve has also led to an increase in our financials exposure.

For 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 reduced our underweights in Financials and Energy (Bank of Montreal, EOG Resources), and reduced allocation to Staples (Church & Dwight) and Discretionary (Alibaba). Technology, Industrials and Materials are our favoured sectors while Energy and Utilities are our largest underweights.

Fixed Interest

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by Diana Gordon, Head of Fixed Interest

Performance

The Kiwi Wealth Fixed Interest Fund (Fixed Interest PIE) returned -0.81% after fees and taxes in November outperforming its benchmark which returned -1.32%. The outperformance can largely be attributed to having lower maturity bonds than the benchmark at a time when longer maturity interest rates spiked. Performance also benefitted from credit spreads decreasing in the face of the vaccine news.

The welcome vaccine news and clarity on the presidential election winner both sparked a meaningful global equity rally in November. Bonds typically sell-off when sentiment is high as investors chase the stock action and sell their safe-haven fixed income investments. That pushes their yield up. Sure enough, the yield on the touchstone US 10-year maturity treasury bonds started the month at 0.87% and traded as high as 0.97%. However, the yield came back down to end the month only 3 basis points lower at 0.84% amidst burgeoning infections and the inability of the Senate to act on much-needed stimulus. US economic data has consequently been a little weaker than expected and the US Federal Reserve (Fed) has now made the implicit explicit admitting that it may well need to augment it’s $80bn/month bond buybacks to provide further stimulus.

As telegraphed, the Royal Bank of Australia (RBA) cut their overnight rate from 0.25% to 0.10% on November 3rd while being clear they thought negative interest rates were “not sensible”. They also increased the maturity and size of their bond buy-backs to A$100bn over the next 6 months. In addition, they extended their purchases to state bonds (some of which we have been buying and which performed very well on the back of the announcement). Despite all this, Aussie bond yields did rise on the back of a stronger than expected economy coming out of the Victoria lockdown. 10-year bond yields consequently rose from 0.83% to 0.90% over the month.

New Zealand’s longer-term interest rates spiked in November with the NZ 10-year government bond closing the month up 32 basis points to 0.85%. The predominant reason for the spike was a marked change of tone from the Reserve Bank at its Monetary Policy meeting. After months of “we are not bluffing” rhetoric on their pursuit of negative interest rates, they unexpectedly acknowledged that the NZ economy was doing better than expected. The icing on the cake was an exchange of letters between Finance Minister Grant Robertson and RBNZ Governor Adrian Orr. Robertson asked the Reserve Bank to consider taking house prices into account in its setting of monetary policy while Orr demurred batting the responsibility back to the government. The market responded by pricing out any future negative interest rates causing longer maturity bonds to sell-off.

Positioning

Having taken some chips off the table in October, November was quite quiet. We were net sellers of long-dated maturities, selling more 2028 and 2031 NZ Government (rated AA+) bonds while buying the new 10-year World Bank (AAA) issue.

Right now, we are focusing on shorter maturities (albeit there may be some yearend anomalies that might be worth pursuing in longer maturity bonds). We like shorter bonds because, even if not going negative, it’s still quite likely that the Official Cash Rate (OCR) will remain very low for the foreseeable future. There may even be an Aussie-like cut to 0.1% given the unwelcome rise of the NZD vs. US$ above 70¢.

We purchased new Chorus (BBB) 7-year bonds, having gained comfort that the buildout of the unique national fibre network is behind them, after the NZ bond sell-off. We also added short maturity bonds of Meridian (BBB+) and Z-Energy (NR).

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