Key market movements - June 2020

Following the remarkable price action of the first quarter, the investment roller coaster that is 2020 continued from April to June. Markets responded very strongly to ongoing financial stimulus (central banks buying securities), accommodative monetary policy (low interest rates) and an upward revision in expectations about the impact of Covid-19.

Economic data released in April confirmed the severe impact of the lockdown, but as economies re-opened (to varying degrees), many businesses and employees began to get back to work. This led to an improvement in economic and corporate news. Compared with the outlook during the peak of the Covid-19 uncertainty in March, company earnings were generally revised upwards, and unemployment projections were revised downwards. This reduction in uncertainty, and (relative) increase in expected long term global output was positive for almost all risky assets.

The speed of the market recovery was slowed late in the quarter with a second wave of Covid-19 cases in the US, forcing some states to consider reinstating lockdown restrictions. With social unrest and an increase in confirmed cases of Covid-19 globally, an improving sharemarket seemingly highlighted a disconnect between Wall Street and the main street.

However, markets are truly forward looking. Market participants are pricing in long term expectations of global economic growth and each and every firm’s participation in that growth. When the quarter began, expectations of economic recovery were frail and weighed down by valid fears of the potential catastrophic impact of Covid-19. But, as social restrictions began to ‘flatten the curve’ and economies began to slowly reopen, the very worst fears began to be priced out.

Today's bad news isn’t nearly so bad when yesterday’s news was worse.

 

International shares

+18.2% (hedged to NZD)

+10.2% (unhedged)

In sharp contrast to the cacophony of negative returns in the first quarter, most developed market equity indices posted double-digit gains. The US led the charge with the S&P 500 Index (total returns in USD) advancing +20.5% for the quarter. This is only the fourth quarterly gain over +20% in this index since the Great Depression, almost a century ago, and the first since 1998.

In general, smaller capitalisation companies outperformed after lagging the market earlier in the year. Information technology firms continued to outperform with many firms’ cashflows unaffected, or even benefiting from the health crisis. Consumer discretionary, materials, and energy sectors also enjoyed good quarters as economic activity picked up. Defensive sectors such as utilities and consumer staples lagged, although these sectors were amongst the better relative performers in the first quarter. The real estate and financial sectors’ recoveries were also subdued, and after being among the worst hit in the first quarter, they are now the lagging US market sectors for the year to date.

There was some dispersion among the returns of European nations as each had varying success at containing the virus.  In aggregate, the MSCI Europe ex UK gained +15.1%. The recovery for members of the European Union was aided by the European Central Bank expanding its Pandemic Emergency Purchase Programme by a further €600 billion until June 2021 (or until the bank believes the crisis is over).

Britain suffered some of the highest infection rates and endured some of the longest and most severe lockdowns, which weighed on their domestic market, as the UK’s FTSE 100 made ‘just’ +9.1% (in GBP) for the quarter.

In a reversal of the price action in the first quarter, the New Zealand dollar strengthened as foreign investment flowed back into New Zealand. This diminished New Zealand investor gains on unhedged foreign assets.

In New Zealand dollar terms, the MSCI World ex Australia Index delivered a quarterly return of +18.2% on a hedged basis and +10.2% unhedged. Whether looking at hedged or unhedged performance, the returns for this index are again positive over 1, 3, and 5 year periods, while the annualised 10 year returns comfortably exceed 10% p.a.

Source: MSCI World ex-Australia Index (net div.)

 

Emerging Markets shares

+9.3%

Emerging Markets also made strong gains through the quarter, albeit in the face of increasing infection rates in many emerging nations such as Brazil and India. Markets with higher levels of foreign debt did best, with a relative weakening of the US dollar helping to ease their debt servicing obligations.

After a relatively more robust first quarter performance, gains from China were below average in the second quarter, despite the nation’s economic recovery continuing and the government delivering further fiscal stimulus. Geopolitical concerns remain, with US-China relations strained by Donald Trump’s continued insistence, that the blame for the pandemic can be laid at China’s door and hinting at further trade sanctions. China didn’t help its cause imposing a law in Hong Kong on 30 June that will empower the arrests of anyone in Hong Kong (citizen or visitor), who has criticised the Chinese Communist Party.

Technology-heavy exporting economies such as South Korea and Taiwan did well in the hopes of a normalisation in global demand, while India was supported by ongoing stimulus from their central bank. Brazil recorded a strong gain, while Russia lagged after reaching an agreement with OPEC to temporarily reduce oil production.

The MSCI Emerging Markets Index produced a quarterly return of +9.3%, for a +0.9% return over the last 12 months.

Source: MSCI Emerging Markets Index (gross div.)

 

New Zealand shares

+16.9%

Immediately after posting its worst ever single quarter, New Zealand’s S&P/NZX 50 Index posted its largest single quarter gain since 1998, advancing +16.9%. New Zealand’s three largest listed companies (Fisher & Paykel: +27.2%, a2 Milk: +27.5% and Meridian Energy: +29.3%) were all very strong. Tourism related firms like Air New Zealand (+69%), Tourism Holdings (+97%) and Auckland Airport (+43%) all bounced back significantly from their late March lows, as the relaxing of lockdown restrictions at least restored the ability for kiwis to enjoy domestic tourist activities.

Similar to global trends, firms in the energy sector didn’t participate as strongly in the recovery due to compressed prices and profit margins. Listed real estate companies also struggled, in particular those with assets tied to retail space. The economic downturn and increased levels of unemployment will reduce discretionary spending and may compromise some retail outlets’ ability to renew leases.

Overall, the S&P/NZX 50 Index advanced in all three months for a +16.9% quarter and leads all asset classes over 1 year (+9.9%) and 10 years (+15.8% per annum).

Source: S&P/NZX 50 Index (gross with imputation credits)

 

Australian shares

+20.8%

The Australian share market was amongst the strongest in the second quarter with the S&P/ASX 200 returning +16.5% in Australian dollar terms. Small capitalisation companies performed even better with the S&P/ASX Small Ordinaries Index rising +23.9%, although still down -9.2% year to date.

Dominated by the materials and financials sectors, it was the miners in the materials sector that led the rebound, as global demand for industrial metals returned. BHP (+24%), Fortescue Metals (+39%) and Newcrest Mining (+37%) were amongst the top performing shares for the quarter. The banks were more subdued with the four largest (Commonwealth Bank, Westpac, NAB, and ANZ) all advancing in the order of +10%.

Former market darling, Telstra, continued its struggles with only a small gain. Large biotech company CSL declined through the quarter, but remains one of the few positive performing large cap stocks on the ASX, over the last 12 months.

Returns to New Zealand investors, were further enhanced by a relatively strong Australian dollar over the quarter, as the NZD / AUD foreign exchange rate pulled back from parity.

Source: S&P/ASX 200 Index (total return)

 

International fixed interest

+0.6%

With central banks continuing to provide market liquidity, through asset purchasing programmes, and holding interest rates at or near zero, the yields on high quality government bonds were relatively unchanged. The US 10-year government bond traded in a narrow range and ended the quarter effectively unchanged yielding 0.66%. With the Federal Reserve “not even thinking about, thinking about raising rates”, this low interest rate environment looks likely to continue.

Conversely, corporate bonds enjoyed a strong quarter. With economic activity showing signs of greater resilience, the prospects of widespread corporate default reduced, enabling the prices of many under stress securities to rally.

In general, it meant a partial reversal of many of the declines seen in March, with the lower credit quality segments of the market outperforming. Even so, credit spreads (the additional yield on bonds backed by riskier issuers) remain elevated.

In aggregate, corporate bonds outperformed higher quality sovereign bonds, and longer duration bonds outperformed shorter duration. The FTSE World Government Bond Index 1-5 Years (hedged to NZD), posted a +0.6% gain, to take its 12 month return to +3.6%, while the broader Bloomberg Barclays Global Aggregate Bond Index (hedged to NZD), returned +2.4% for the quarter, and +5.7% for the last 12 months.

Source: FTSE World Government Bond Index 1-5 Years (hedged to NZD)

 

New Zealand fixed interest

+3.4%

New Zealand’s fixed interest market delivered more action than was generally seen in global markets, with the 10 year New Zealand government bond yield pushing as low as 0.51% in May; with levels never seen before in New Zealand. Through the second half of the quarter, yields increased again and closed the quarter at 0.96%, for a -0.15% decrease since March 31.

This point to point decline in yields meant a price rise for most underlying bonds and, when combined with narrowing credit spreads, resulting in a +3.4% return for the S&P/NZX A-Grade Corporate Bond Index. This is one of the better quarters for this asset class in recent history. The longer duration, but higher quality S&P/NZX NZ Government Bond Index, gained +2.3%.

The Reserve Bank of New Zealand held the Official Cash Rate at the record low 0.25% at all three meetings in the quarter and significantly expanded the Large Scale Asset Purchases (“LSAP”) programme on May 13. The LSAP now includes a commitment to purchase up to $60 billion of New Zealand Government bonds, Local Government Funding Agency bonds, and now, Government Inflation-Indexed Bonds in the secondary market. The LSAP aims to keep borrowing costs low and to improve the functioning of the credit markets to help support New Zealand firms navigate the economic uncertainty resulting from the Covid-19 pandemic.

Source: S&P/NZX A-Grade Corporate Bond Index

 

Table 1: Asset class returns to 30 June 2020

Asset Class Index Name 3 months 1 year 3 years 5 years 10 years

New Zealand shares

S&P/NZX 50 Index
(gross with imputation credits)

+16.9%

+9.9%

+15.7%

+16.1%

+15.8%

Australian shares

S&P/ASX 200 Index (total return)

+20.8%

-5.5%

+5.9%

+4.6%

+6.3%

International shares

MSCI World ex Australia Index
(net div., hedged to NZD)

+18.2%

+1.9%

+6.7%

+7.7%

+11.9%

MSCI World ex Australia Index (net div.)

+10.2%

+7.4%

+11.5%

+8.0%

+10.8%

Emerging markets shares

MSCI Emerging Markets Index (gross div.)

+9.3%

+0.9%

+6.7%

+4.3%

+4.3%

New Zealand fixed interest

S&P/NZX A-Grade Corporate Bond Index

+3.4%

+5.8%

+5.7%

+5.2%

+5.8%

International fixed interest

FTSE World Government Bond Index 1-5 Years (hedged to NZD)

+0.6%

+3.6%

+3.0%

+3.1%

+3.7%

New Zealand cash

New Zealand One-Month Bank Bill Yields Index

+0.1%

+0.9%

+1.5%

+1.8%

+2.4%

Unless otherwise specified, all returns are expressed in NZD. Australian shares and Emerging Market shares are invested on an unhedged basis, and therefore returns from these asset classes are susceptible to movement in the value of the NZD. Index returns are before all costs and tax. Returns are annualised for time periods greater than one year.

 

For a detailed review of the market commentary for the quarter, see ‘Market commentary - September 2020’ or click here to view the full newsletter in PDF.

 


Disclaimer

Information contained in this newsletter does not constitute personalised financial advice because it does not take into account your individual circumstances or objectives. You should carefully consider whether the Synergy investment portfolios are appropriate for you, read the applicable offer documentation, and seek appropriate professional advice before making any investment decision. The information in this newsletter is of a general nature only. Investors should be aware that the future performance of the Synergy investment portfolios may differ from historic performance. Details are correct as at the date of preparation and are subject to change. The investment objectives and strategies of the Synergy investment portfolios may change in the future.

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