Friday 6 November, 2020
Global Market View
Two themes were top of mind for investors in the month of October, the second major wave of Covid-19 outbreak across Europe, and the highly anticipated upcoming US elections in early November. Volatility climbed to levels seen back in June, and developed markets broadly declined. The MSCI All Country index (NZD hedged) fell 2.5% over the month, although several bright spots were seen across emerging markets. Declines were concentrated around the energy, healthcare and tech sectors, while utilities and communication services outperformed.
Over the course of the month, markets observed the Covid-19 situation deteriorate across much of Europe. Daily new cases and hospitalisations surged drastically as localised restrictions failed to curb the rate of spread. Total cases in the region have now reached a milestone of 10 million cases, and many authorities have now or are in the process of implementing nation-wide lockdowns. This raises doubts around just how effective a curve suppression approach is. Economic impacts aside, the increasing psychological pressures has made social disorder become somewhat of a rising concern with protests breaking out across the likes Spain, Italy and France.
Across the Atlantic, the United States weren’t immune. To the surprise of many, President Trump along with key members of the White House tested positive for the coronavirus at the start of the month and by the end, daily new cases in the country had risen to record highs of almost 100 thousand. The gridlock in the fiscal stimulus package negotiations remains a sore point, the tug-o-war between lawmakers to date yielded no substantial results and was one of the main culprits for the increased volatility over the month.
That said, much of the focus was instead directed to the upcoming election on 3rd of November. National polls favoured Democratic nominee Joe Biden over the month and the markets responded well, pricing in a potential Democratic sweep into the Presidency, Senate and the House. Generally, it is not out of the ordinary for market volatility to remain elevated in the period leading up to an election, but this typically dissipates afterwards. It is largely expected that a Biden victory would bring forth greater fiscal stimulus, which a positive for the economy.
Our portfolios remain well diversified, liquid and ready to be tailored whatever the outcome may turn out to be. As you’re reading this, the votes will hopefully have been counted. We look forward to sharing with you our post-election thoughts shortly.
by Nathan Field, Portfolio Manager - Global Thematic and Steffan Berridge, Head of Quantitative Strategy
The Kiwi Wealth Growth Fund (Growth PIE) returned -1.92% after tax and fees in October, 0.71% ahead of the MSCI All Country benchmark which returned -2.64%. All three of the underlying equity strategies contributed positively to relative performance this month, and in addition the alternative assets outperformed cash and equities. The Kiwi dollar weakened slightly against the US greenback last month which is a positive for foreign currency returns.
Global Thematic finished 0.72% ahead of the benchmark in a volatile month for equity markets. US banks were among the best performers of the month amid a slight rise in interest rates and hopes of a Democrat sweep in the US elections (which didn’t transpire). Similar political hopes were behind the outperformance of construction materials stocks Vulcan Materials and Martin Marietta. High growth technology stocks lagged the market in October as investors questioned high valuations and weighed regulatory risks.
The Global Quantitative fund were 0.77% ahead of the MSCI AC benchmark as a new coronavirus wave hit the US and Europe and the world steadied for the American Peoples’ assessment of President Trump in early November. The virus resurgence pushed markets down for the month, with COVID-defensive sectors like Utilities and Communications outperforming while Energy, Tech and Healthcare lagged. Crude oil was down 10% while treasury yields were up 17bps. Outperformance was driven by Healthcare and Industrials positions with United Therapeutics and Quanta Services delivering stronger than expected earnings, while the best performer overall was Dunkin’ Brands which also surprised on the upside in its release. Our worst sector was Communications where underweights in Alphabet, Snap and Tencent were a headwind.
In Global Thematic, we had positioned the portfolio to be resilient under any political outcome in the US, having a mix of secular growth and cyclical themes. The combination of a (likely) Democrat president and Republican Senate certainly weakens the case for some cyclical and interest rate sensitive stocks, but we will reassess our suite of themes once the final votes are counted.
For Global Quantitative, Our top-down positioning targets higher quality sectors more suited to the current environment like Technology and Industrials. Stock selection favours companies with attractive metrics across earnings quality, capital efficiency, valuations, sentiment and sustainability. Over the month, we increased our allocation to Materials (Linde, Nitto Denko) and Healthcare (IDEXX Labs), and reduced allocation to Industrials (Eiffage, J.B. Hunt Transport) and Utilities (Evergy). Industrials, Technology and Discretionary remain our favoured sectors while Financials and Energy remain our largest underweights.
by Diana Gordon, Head of Fixed Interest
The Kiwi Wealth Fixed Interest Fund (Fixed Interest PIE) returned 0.12% after fees and taxes in October outperforming its benchmark which returned -0.20%. The outperformance can largely be attributed to having a lower maturity than the benchmark at time when longer maturity interest rates increased.
We haven’t talked much about the US in a while because, well, there wasn’t much to say. Their 10-year maturity treasury bonds have traded in a tight range for months. Not so in October which saw that yield increase from 0.68% to 0.87%. What drove this move? Most of it seems related to large short positions as speculators position themselves for a Biden sweep. The thesis is that there will be huge infrastructure stimulus kicking in after a January legislation. Also, economic activity has picked up with Q3 GDP rising a higher than expected 33.1% from the lows of Q2.
However, two forces will likely keep US treasury yields, the touchstone for our own bond market, from rising too far. Firstly, surging infections will likely depress economic activity albeit not likely with the degree of lockdowns seen previously. Secondly, the US Federal Reserve is a long-term manipulator of rates. Only so far and no farther is likely their mantra before they come stepping back in to buy bonds. What the definition of so far is unknown but it’s highly unlikely to be much over 1.25%, if that.
Talking of buying bonds, the Reserve Bank of Australia (RBA) came off the fence in October hinting about increasing their own bond buy-backs. A further overnight interest rate cut to 0.1% was also hinted at likely to happen after their 3rd November meeting (which they did, more of that next month). Their 10-year bond rate consequently only rose marginally from 0.79% to 0.83% over the month.
New Zealand’s longer-term interest rates followed the US up with the NZ 10-year government bond closing the month up 3.5 basis points to 0.53%. They outperformed the US due to some tempering by Australia’s move and the relentless reminders from our Reserve Bank that they will be cutting the Official Cash Rate (OCR) after March next year. While our economy continues to perform well, the RBNZ remain concerned about the global economy.
We took some chips off the table in October, selling some of our longer 2031, 2037 and 2041 maturity New Zealand Government bonds and switching into lower maturity New South Wales bonds (AAA) and the newly syndicated New Zealand Government (AA+) 2028 maturity. The rationale was twofold. Firstly, there is the higher risk that longer maturity interest rates would rise in the event of a Biden win, dragging Australia and New Zealand rates along and thus leading to lower bond prices. We also expected the Reserve Bank of Australia to target their state bonds for repurchase in early November. We added a few corporate names, Australian supermarket chain Coles (BBB+),US telecom giants Verizon (BBB+) and AT&T (BBB) all in Australian dollars. We also purchased NZ utility, Vector (BBB+) at new issue.