Wednesday 7 October, 2020
Global Market View
After a steady climb higher over recent months, equity markets took a breather in September as investors gauged the prospect of a second wave of COVID-19 infections in the Northern hemisphere alongside mixed views on the timeline of a potential vaccine. The MSCI All Investment Update October 2020 Country index (NZD hedged) fell 2.8% over the month, with all the major markets showing weakness except for Japan.
Even technology giants like Apple (-10.3% in September), Amazon (-8.8%) and Microsoft (-6.7%) finally succumbed to profit-taking after their incredible runs in the year to date.
While equity markets were weak, there was nothing particularly new or unexpected in September’s news flow. But with share prices starting the month 66% above their March lows, a pullback was always on the cards, especially as we head towards the US presidential elections in early November.
The Democrat nominee, Joe Biden, is currently the favourite to win the White House, which would have puts and takes for equity markets. Higher corporate taxes and increased regulations would likely weigh on certain sectors, but heavier spending on green energy and infrastructure could offset. In our view, the greatest risk of the election is a prolonged period of uncertainty over a disputed result, which could shake confidence in an already tenuous economic recovery.
The pandemic is the other significant risk weighing on investor sentiment, with infection rates on the rise again in Europe, and US cases stubbornly high. Even though patient outcomes have greatly improved, it is becoming increasingly clear that until an effective vaccine becomes widely available, economic activity will struggle to return to normal.
Nevertheless, low interest rates should continue to support share prices. The US 10-year yield barely moved in September, finishing the month at a miserly 0.68%. We see little evidence of inflation or economic strength that would cause central banks to tighten monetary conditions, and while COVID-19 continues to cast a shadow over consumer confidence, the low interest rate environment is likely to persist.
However, if the Democrats win the White House and an effective vaccine is found, the situation could change rapidly, especially if markets reset inflation expectations. Regardless, our large, liquid investments mean we can swiftly reconfigure the portfolio to suit any climate. As this challenging year has already proven, maintaining a focus on the long term is crucial, as opportunities can manifest in even the most trying economic conditions.
by Nathan Field, Portfolio Manager - Global Thematic and Paul Shucksmith, Quantitative Developer
The Kiwi Wealth Growth Fund (Growth PIE) returned -1.45% after tax and fees in September, 0.64% ahead of the MSCI All Country benchmark. Both Global Thematic and Global Quantitative strategies contributed positively to relative performance this month, while Core Global and the alternative assets were drags. The Kiwi dollar weakened against the US greenback last month which was a tailwind for foreign currency returns.
Global Thematic managed a positive 0.24% return despite the weakness in equity markets, outperforming the benchmark by 1.24%. Our US homebuilding and public construction themes performed strongly, with quarry companies Martin Marietta and Vulcan Materials both rising over 14%. Athleisure stocks also had a strong month after Nike’s blowout quarterly earnings result, although Lululemon fell victim to profit taking. Large cap tech names like Apple, Microsoft and Facebook were notable laggards in September after a lengthy period of outperformance.
The Global Quantitative fund returned -0.67% in September, 0.33% ahead of the MSCI AC benchmark as most sectors ended the month lower although a fall in the NZD improved the picture somewhat. September saw a change in fortune for the large-cap growth names that have been leading the markets’ recovery from the Coronavirus Crash with concerns around inflated valuations and investor crowding coming to bear. Energy sold-off heavily, with the WTI falling below $40 a barrel at one point as global demand softened and Gulf Coast activity resumed after Hurricanes Laura and Marco. Industrials and Utilities the leading sectors.
Outperformance was driven by our focus on Asian tech names (United Microelectronics, Samsung) and our underweight in Banks (avoiding names like Citigroup and Bank of America) and Energy (Exxon, Chevron, BP all experienced large declines). Health Care was the biggest drag on performance with Illumina and Henry Schein the worst positions.
In Global Thematic, we have continued to tilt the portfolio towards re-opening themes, building positions in offprice retail stocks like Ross Stores and TJX, as well as selected restaurant stocks. We also increased our weight in some of the large cap technology names that were hit hard in September (Amazon, Apple).
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 Financials (E.SUN Financial, China Life Insurance) and Industrials (Deutsche Post), trimming Health Care (Abbvie, Illumina) and Staples (a2 Milk). Industrials, Technology and Discretionary remain our favoured sectors. Health Care has been brought down to neutral 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 0.39% after fees and taxes in September underperforming its benchmark which returned 0.58%. The underperformance can mostly be attributed to trying to keep up with a relentless Reserve Bank-led crunch on interest rates. Also, corporate bonds spreads (extra yield a company pays versus a government bond) widened relative to NZ Government Bonds over the month.
September was largely a sleepy month for foreign government bonds, trading in their habitual range of interest rates. The interest rate on a US Government Treasury bond declined from 0.70% to 0.68% over the month. On the margin, there were cracks as the Bank of England began – like New Zealand – to make noises over preparing to cut interest rates to negative levels. This was amidst Coronavirus rates beginning to rise again and a consequentially dourer economic outlook. This, and the constant noise from the hotly contested US presidential election, also pushed credit spreads wider. After an unequivocally dovish (lower interest rates for longer) statement in August, the RBNZ continued to leave no doubt that negative interest rates are on the cards. As at the end of the month, the Official Cash Rate (OCR) currently at 0.25% is expected to be ~ -0.2% by October next year. It’s clear that the gloves will be off to cut the OCR after March 2021 (the RBNZ having affirmed that it will keep the OCR at 0.25% until then). The one change in the Reserve Bank’s position at its 6-weekly meeting was that it stated that it would like its new Funding for Lending Program to be in operation by Christmas. This facility would allow the RBNZ to lend to banks at the Official Cash Rate (OCR) rate (or thereabouts), which would provide cheap funds and allow banks to make cheaper loans (mortgages etc) to their customers. Conversely, it will also likely suppress term deposit rates even more (though we don’t believe below zero). Two other factors pushed New Zealand interest rates lower (and hence bond prices up) apart from the strong jawboning from the RBNZ backed up by solid government bond buying. On Sep 16th the Treasury published its Preelection Economic and Fiscal Update (PREFU) forecast stating that the NZ budget deficit should be NZ$15bn less than expected over the next two years thus reducing the prospective supply of bonds. Also, the next big government issuance was a bit shorter than the markets thought so all ended up in a bit of a grab for positive yields even as rates sank, some shorter maturity bonds trading below 0%. Consequently, the interest rate on a 10-year NZ government bond bucked the global trend declining from 0.63% to 0.51% over the month ironically despite our Coronavirus outbreak being increasingly under control. All the signs from the RBNZ is that they fear deflationary effects from global weakness as government support begin to decline. The path of least regret for them is lower for longer interest rates.
We continued to focus on high quality credits over September, as we remain very selective about the types of names and companies we want to own. We added Housing New Zealand (AA+), Asian Development Bank (AAA), International Bank of Reconstruction and Development (AAA) and Norwegian State Housing Authority, KBN (AAA). The New Zealand company bond market began to heat up in September and we purchased Port of Tauranga (A-) and Mercury (BBB+) new issues. Overseas we began to add a few names like AT&T (BBB) and Nestle (AA-) and we hope to add more if high quality company credit spreads continue to widen. Given the RBNZ’s tack, we’ve been big proponents of the New Zealand bond market for a while which has paid off. However, we did dip our toes in the Australian State market, establishing a position in New South Wales bonds which we saw as very cheap relative to New Zealand Government Bonds.