Quarterly market commentary - September 2020

After an extraordinary first six months in 2020, global share markets consolidated between July and September by generally delivering more positive results.

This is a further reminder of the contradiction that exists between real world data and share market performance. We are all aware of the extraordinary impact that Covid-19 had on the world during the first quarter. With Covid-related fears reaching panic levels in late March, we saw a synchronised sell-off in global share markets unlike any other.

But suddenly, near the height of the panic, share markets changed course. Over subsequent months they staged a strong recovery, in some cases even exceeding pre-Covid levels.

In many ways, that too seems equally extraordinary. After all, Covid-19 has not been defeated. A vaccine remains elusive. Covid ‘second waves’ are being experienced by many countries, and reports of job losses are still consuming significantly more column inches than stories of job gains. International travel remains impractical for many, and numerous firms (if not industries), have yet to demonstrate they will adequately be able to cope when the wage subsidies and other central support packages run their course.

To the everyday person on the street, this does not paint an overly optimistic picture, and yet global share markets have been performing well since April. What this tells us is that share markets are not greatly concerned about what is going on in the world today. Rather, they are relentlessly looking into the future.


Global share markets

Share prices today are based on aggregate investor perceptions of each company’s asset base and growth opportunities in the months and years ahead, with that projected growth being discounted back to a present day valuation. In other words, share prices today represent the market’s collective expectation of the future. And in that future, many of the issues we still see around us today may not even exist, including (we hope) Covid-19.

In contrast, many of the economic statistics used to try and help us quantify and understand the state of the world today (like GDP growth rates and unemployment figures), are backward looking. They are often calculated with a time lag of several weeks or months (meaning we generally do not find out this information until some considerable time after the fact). Even then, the data typically contains some degree of measurement error. It’s therefore no surprise that a forward-looking share market can occasionally sprint ahead of our best understanding of the ‘current’ economic situation.

Globally, Covid-19 remained the number one news item in the quarter. This was to be expected, as it continues to have such a significant impact on matters ranging from the state of the global economy, to health and welfare, government policy, regional lockdowns, international travel and economic support measures. The ongoing build-up to the US election in November, and the near farcical state of the Brexit negotiations, were relegated to ‘supporting news’, and even these events were at times overtaken by stories of Covid second waves sweeping both the UK and USA.

 

What’s happening in New Zealand

In New Zealand, one of the talking points as the quarter progressed, was the Reserve Bank of New Zealand (RBNZ) reinforcing its intentions to reduce bank funding costs. Having already signaled the possibility that short term interest rates could be allowed to turn negative in 2021 (mirroring the environment in a number of overseas countries), the RBNZ announced an alternative option to reduce bank funding costs even earlier.

The proposed Funding for Lending Programme is expected to be launched before the end of 2020 and would see the Reserve Bank offering funding to banks at ultra low interest rates. This, in turn, would enable banks to lend at a cheaper rate, while maintaining a profit margin. This shapes as further bad news for term deposit investors, as the interest rates on these instruments would be likely to reduce as a result. However, for borrowers and, by implication, the property market, this is likely to be considered a positive.

The housing market in New Zealand appears to have rebounded in response to lower interest rates. Household loan growth has clearly picked up and house prices have recovered from declines seen in April and May. According to the Real Estate Institute of New Zealand (REINZ), New Zealand house prices (on a like for like and seasonally adjusted basis) have increased almost 3% since May and have reached new all-time highs.

 

Looking ahead

In what has already been a turbulent year, in many ways all we can do is shake our heads at what has happened around the globe, be grateful we live in New Zealand, and focus on the things that we can reasonably control. In the context of a long term savings and retirement plan, that might mean reviewing or updating our short, medium and long term goals and objectives. Alternatively, it might mean reviewing our budget or our savings plan; it might even mean reviewing our preferred investment risk settings.

We can, and should, focus on these things, because they are what will have the biggest positive impact on the outcomes that are most important to us. Of course, we should also exercise personal care and responsibility. But, when it comes to the big issues, we must exercise patience, and have a little bit of faith that sustainable solutions will be found. After all, we have governments wrestling with how to keep people safe, we have central banks trying to keep economies functioning and we have pharmaceutical firms who are trying to find Covid vaccines.

2020 has already delivered a resounding reminder that the interrelated world of markets, economics, health and politics reflects an incredibly complex and ever-evolving system. While that’s part of what makes forecasting so difficult, we are thankfully aware of our limitations.

We know we can’t predict how Covid-19 will eventually be contained or controlled. We can’t predict how investment markets may perform over any short term horizon. We certainly can’t predict what new information or unforeseen events may emerge tomorrow to change how we think and act today. Without a crystal clear view of the future we simply don’t know how the current, complex, issues of the day will all eventually be resolved. But not knowing, doesn’t mean it won’t happen.

If the relative strength of the share market today is any guide, business is not expected to go out of business. In contrast to the challenging economic environment we still see around us today, the share market appears to be pricing in far more promising times ahead.

 

For a detailed review of the asset class performances for the first three months of the year, see ‘Key market movements’ 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.

While every care has been taken in its preparation, Consilium NZ Limited (‘Consilium’) makes no representation or warranty as to the accuracy or completeness of the information in this newsletter and does not accept any liability for reliance on it. The capital value, performance, principal, and returns of the Synergy investment portfolios are not guaranteed or secured in any way by Consilium, or any other person. Investments in the Synergy investment portfolios do not represent deposits or other liabilities of Consilium and are subject to investment risk, including possible loss of income and principal invested.