After accounting for currency fluctuations, returns from international shares rose 5.2% in the September quarter. Over 12 months, returns rose 4.6%. (FTSE Developed All Cap Index in NZ dollar terms)
NZ equities returns, as measured by the S&P/NZX 50 Gross Index, rose 2.6% in the quarter after stunning gains made in the June quarter. Over 12 months, NZ equities rose 7.5% (S&P/NZX 50 Gross Index).
Emerging markets returns rose 9% in the September quarter, and were up 9.5% over the year. (FTSE Emerging Markets All Cap)
Australian equity returns, as measured by the S&P/ASX200 Total Returns Index, fell 0.4% in the September quarter. Over 12 months, Australian equities fell 10.2%. (S&P ASX 200 Total Return Index)
International fixed interest/bonds
Returns from overseas bonds were up 0.7% in the quarter. Over 12 months returns rose 3.9%. (Bloomberg Barclays Global Aggregate Total Return Index NZD Hedged)
NZ bonds returned 1.7% in the quarter. Over12 months, returns rose 5.3%. (S&P/NZX A-Grade Corporate Bond Index)
Most funds managed to hold onto their gains in the September quarter in a market dominated by swings on Wall Street, and a world still coming to terms with COVID-19’s impact.
SuperLife Income, which does not have any exposure to equities, returned 1.2% in the quarter and 3.2% over 12 months.
SuperLife Conservative, invested mainly in income assets, returned 2.3% in the quarter, and 1.3% over 12 months.
SuperLife Balanced (which typically has 60% in equities/listed property and 40% in cash and fixed income) returned 3.5% in the quarter, and 0.6% over 12 months.
SuperLife Growth returns rose 4.2% in the quarter but over 12 months, returns fell 0.9%. This fund invests mostly in international equities, some cash and fixed interest.
SuperLife High Growth, mostly invested in higher risk assets such as equities and property stocks, returned 4.8% in the quarter but over 12 months, returns fell 2.1%.
Ethica, which invests into funds that have strict sustainability criteria, returned 5.2% in the September quarter, and over 12 months returns rose 4.5%.
Figure 1: Equities recovery choppy, bonds stay flat lined
The September quarter gave investors a good glimpse into the fickle nature of investor behaviour. During the quarter, Wall Street chalked up its largest gain in 30 years, all within the month of August. This celebratory mood gave way to caution during the first week of September when the S&P 500 took the biggest plunge seen in three months, down 3.5% over one trading day. Just before the quarter ended, investors were tentatively making their way back into the market.
Despite a somewhat shaky period, the September quarter ended in a more positive mood. Equity markets have been surprisingly resilient after the major sell-off seen in March, at the height of the COVID-19 pandemic.
In many ways, investor behaviour was split into two camps during the September quarter. Half took comfort in the resilience of the equities market and continued to buy shares in big tech companies such as Facebook, Amazon, Apple, Netflix, and Google. Collectively, these stocks are popularly known as FAANG stocks. The other half took advantage of what gains they made, booking some profits, hence the correction in the S&P500, and in particular the FAANG stocks.
It was also very much a world of two halves in terms of fortunes. In one half, Zoom became an overnight sensation as the world flocked to its meeting technology; Netflix provided major distraction for a world mostly in isolation; and online trading technology providers were in demand as shoppers spent time and money online.
For the other half of investors, the sudden hibernation of global tourism damaged the fortunes of global carriers, as well as the tourism and services sectors. US airlines, for example, reported an after tax net loss of US$11 billion in the first three months of the year, according to CBS News.
Government’s soothing aid
Amid an uncertain COVID-19 world, there is one constant — the unwavering and solid determination of governments around the world to provide fiscal and monetary policy support to keep their economies running.
The going has been tough. In New Zealand, the economy took a hard hit despite a massive fiscal programme to mitigate the impact of COVID-19. Government statistics showed gross domestic production (GDP) fell by 12.2% in the second quarter, its first fall since 1987 when this statistical series began. GDP is a measure of economic activity.
Elsewhere, the UK’s GDP shrunk 19.8% in the second quarter, while the US economy shrunk a massive 31.4% during the same period. China was the outlier. Its GDP grew by 3.2% during the same period, surpassing economists’ expectations.
There has been signs of economic recovery across major economies over the last two months but not conclusive enough to point to a full-scale sustained turnaround in economic fortunes.
How deep are governments’ pockets?
What remains to be seen is whether governments around the world can afford to extend the same level of monetary and fiscal stimulus needed to keep the economic engines going.
In the US, the White House and Congress are divided over what levels of monetary support should be given to resuscitate the US economy.
Increasingly, analysts are questioning whether the US Federal Reserve’s monetary stimulus (to help keep the cost of funds low for businesses), can be effective without fiscal support from the government who must then get Congress to approve the fiscal changes.
Central banks and governments continue to look in their tool boxes to see what other options are available to provide cheaper funds and financial support to turnaround their economies.
New Zealand’s Reserve Bank has been signaling to the market it is exploring different tools for monetary stimulus, hinting that negative interest rates may be on their way. In the US, the Federal Reserve has made a policy shift in how it manages inflation, making it known its inflation management will be done without stifling job market growth in a recessionary environment.
Investors will be looking for stronger resolve from governments to cough up more funds to support ailing businesses and those hurting financially.
What does all this mean for investors?
The months ahead will see the unfolding of the recessionary impact across the world. The market can take some comfort that not all caution has been thrown to the wind. The recent price consolidation has given time for the market to pause and reflect on what has been, on most part, an exuberant retracing of March’s sharp losses.
The S&P500, which tracks movements of large companies, is trading at an expected price-to-earnings (PE) ratio of 22 times, and the NZX50 index is trading at 34 times expected earnings. The PE is an indicator of how expensive or cheap an investment is, relative to its earnings ability.
In the near to medium term, consumer confidence recovery will depend on whether there is more positive economic data pointing to a sustained economic recovery, and how soon safe vaccines can be found for COVID-19.
Here are some thoughts on navigating the current investment environment.
- The environment of low interest rates is here to stay. This is not an environment to chase returns. It is useful to be invested in low-cost providers when returns are challenging.
- A low return environment also means the need to review whether existing investment goals are still valid.
- Fixed income and cash returns will be lackluster in the next 12 months, at least. For those invested in conservative funds, it might be worthwhile to check whether the fund has a mandate to invest in some risk-assets such as equities.
- Despite low yields, government bonds present less risk due to the active bond-buying programme by governments to keep money supply going. High quality corporate bonds will be also be sought after by investment managers.
- For those with a higher risk threshold, global equities can be still attractive. The focus will shift to finding value, given how much the market has recovered.
- For those tempted to switch to lower risk/return funds, remember the best action is to stay on course, and continue to invest regularly to average the cost of investments over time.
SuperLife offers access to 42 funds across different sectors and countries so investors can create portfolios tailored to their needs.
Our Ethica fund is a socially responsible fund geared towards investments in a balance of income and growth assets.
If you are getting close to retirement, the SuperLife Age Steps option lets you set your investment in income and growth assets based on your age. This means as you get older, the proportion of your investment in more volatile growth assets will be reduced, lowering the expected size of the ups and downs in the value of your investment.
These thoughts on investment strategy do not constitute financial advice and do not take into account personal circumstances. They are designed to illustrate possibilities only. As with all investment decisions, what might be the right strategy over the medium or longer term may not pay off over the very short term. No one can consistently predict what will happen over the short term. Those acting upon the information in this newsletter do so entirely at their own risk. SuperLife does not accept liability for the results of any actions taken or not taken based on this information. While every effort has been made to ensure accuracy, no liability is accepted for errors or omissions in this newsletter.