Investment Committee Updates
29 June 2020
Forecast Economic Growth
The International Monetary Fund has revised its forecast for global economic growth sharply lower. The IMF now expects the global economy to shrink in 2020 by 4.9%, compared with a 3% forecast reduction it made in April. China is the only major country forecast to show positive growth (+1%). The global recovery will also be slower than earlier expected. 2021 Growth is forecast at +5.4% down from +5.8% previously forecast.
Forecasts remain very sensitive to Covid-19 conditions and how they will impact on economies. The recent resurgence of cases in the US and parts of Europe is causing concern in this regard.
Success in containing Covid-19 will bring both privilege and deprivation. The European Union may ban US, Russian and Brazilian travellers from entering Europe because of failure to control the virus.
The first point on the EU checklist asks whether the country can "be considered as being in a comparable or better epidemiological situation as the average in the EU+ area" with regard to number of new infections, trend of new infections and response in areas such as testing, surveillance, contact tracing, containment, treatment and reporting.
Travellers from more than a dozen countries that are not overwhelmed by the coronavirus are set to be welcomed when the European bloc reopens after months of lockdown on July 1. The acceptable countries also include China — but only if China allows European Union travellers to visit as well. Countries that made the safe list, which includes NZ, were judged on a mix of scientific criteria that included their infection rates and the credibility of their public health reporting data. The list will be updated every two weeks, raising the possibility that excluded countries will be added.
European Union officials tried to base their decision on scientific criteria, in part to depoliticize the process and shield themselves from diplomatic pressures. But it’s proven to be difficult, with the US and other nations lobbying intensely to get on the safe list.
The US, which banned most European Union travellers in March when the virus was raging in Europe, has not eased its own restrictions since then, even though European infections and deaths have dropped.
Restrictions are not limited to a pure country level. Governors of New York, New Jersey and Connecticut announced that travellers coming in from states that have a high infection rate must quarantine for 14 days. The restrictions came after Florida reported its biggest daily increase in Covid-19 cases.
In Australia, the topic of reopening interstate borders has been a sore spot for weeks – now a number of states have been forced to reconsider their plans ahead of the school holidays as Victoria’s COVID-19 situation escalates.
Currently, the only states whose borders are open to all Australians are those of NSW and Victoria.
All other state and territory borders are either completely closed, or open only to a limited number of other jurisdictions.
The dynamics of travel is entering a new and unprecedented phase. Whilst Kiwis travelling overseas are likely to be welcomed in virtually every jurisdiction, those travellers then face tough and potentially unknown restrictions upon their return back to NZ.
The old local tourism campaign “don’t leave home until you have seen the country” has a new meaning for Kiwis as overseas holiday travel, an OE or a job transfer to London or Sydney is paused for the foreseeable future.
22 June 2020
As expected, the poor economic data has started to flow in. New Zealand's Gross Domestic Product fell 1.6% in the March quarter, in what is the largest decline in 29 years. The fall surpassed quarterly falls during the global financial crisis. The hospitality industry alone was down 7.8%, much of it due to border closures. Industries related to international travel, such as accommodation and transport, began to feel the effects of COVID-19 earlier in the quarter, with activity dropping significantly once the borders closed on March 19.
The construction industry fell 4.1% and the transport, postal, and warehousing industry fell 5.2%. These falls reflected the impact of lockdown measures as building sites shut down and non-essential workers were told to stay home. Compared to other economies we are somewhat in the pack. Australia's economy fell 0.3%, the US by 1.3%, the UK down 2% and Canada down 2.1%. The gap between New Zealand and Australia can be attributed to our faster and more comprehensive lockdown and tourism making up a bigger portion of our economy.
GDP will fall further before it gets better
The governments various relief and support packages including the $11 billion wage subsidy, tax refunds and support for small businesses have cushioned the pandemic's impact but the current quarters GDP number (ending 30 June) will likely be much worse, in the vicinity of -10% to -20%. The worst of the economic impact is still coming for many: unemployment is rising and many firms are experiencing difficulty, with a tourism-shaped hole very difficult to fill. There is likely to be a lot of noise in the economic numbers coming out, so we will need to look closely at indicators such as the housing market, business sentiment and consumer spending to get a sense for underlying economic momentum. On the positive side, the following quarter (beginning 1 July) is expected to see a bounce back with a double-digit gain.
Investors are encouraged to view current market movements constructively. The cycle, generally speaking is a series of up and down oscillations around a central trend line.
A very good recent quote is..."No amount of sophistication is going to allay the fact that all of your knowledge is about the past and all your decisions are about the future".
For the next few years we probably need to get comfortable with discomfort. As the world struggles with the global pandemic and its associated financial crisis, uncertainty and discomfort will be major components of financial markets for the forseeable future. The toll of the disease and the economic impact of fighting it will last for a long time. Remaining well diversified and holding quality assets at this time will be paramount to long term wealth preservation and accumulation.
15 June 2020
The International Monetary Fund reports that governments around the world have collectively spent US$10 trillion in fiscal actions, such as development programs, job support packages and tax policies, to respond to the COVID-19 crisis, but they also see further significant efforts being required over the next two years. The World Bank warned the global economy will shrink by 5.2% this year, the most since WWII, and that emerging market production is expected to decline for the first time since data began in 1960. In NZ, business confidence lifted 9pts to -33% in the preliminary June Business Outlook survey.
While businesses reported their own activity lifting during the month, the majority of firms expect they will have lower activity in the year ahead. All forward-looking activity indicators lifted from May levels but remain extremely weak. Nearly half of firms report having fewer staff than a year ago. An increasing bright spot for NZ is the increased interest from international film projects. Our relative isolation is now an advantage as virus-free New Zealand gives productions a reliable place to work. Demand for NZ actors to fill some of the supporting roles is also on the increase as it becomes more practical for only the main crew and actors to travel into NZ.
According to a survey from the Real Estate Institute of NZ, a net 25% of real estate agents say "they are noticing more investors in the market", up from a net 16% in May, during tighter lockdown conditions. The survey also asked agents about buyers' main concerns. About half of respondents said buyers were worried about insufficient listings, while 37% said buyers are worried about getting a loan. A net 55% of agents said there were more first home buyers in the market than last month. There are roughly 19,000 properties listed for sale at the moment, compared to 58,000 heading into the Global Financial Crisis back in 2007.
Working from Home
COVID has accelerated the working from home trend as a permanent option going forwards for some industries. AMP Wealth Management is set to close its Auckland and Wellington central business office spaces as it moves to a fully flexible working model. Around 350 staff occupying floor space in CBD Auckland and Wellington will now work from home following a successful working experience during COVID-19. A survey of its staff found 70% of workers preferred a combination of working from home and office, while 22% said they wanted to work primarily from home. 8% wanted to stay in the office the whole time. The company will be taking up small meeting-based premises outside the CBDs and the office spaces will be much smaller. Similarly, Telco provider Vocus will keep all of its 200 call centre staff working from home permanently and has accordingly confirmed plans to close its Takapuna office in Auckland following successful operations over lockdown.
08 June 2020
A week is a long time during a pandemic and the latest period has seen a raft of news reports that things are not working out as bad in some quarters as first feared.
Less worse data...for some
While recent US job losses have been severe with 1.4m lost in March and 20.7m in April, May saw 2.5m jobs coming back.
However, in keeping with current racial tensions in the US, underneath the surface paints a different picture. While people may be celebrating the US unemployment rate in May falling from 14.7% in April to 13.3%, black unemployment has remained virtually unchanged. In April, the black unemployment rate was 16.7%, in May it was 16.8%.
Meanwhile white Americans saw the largest decrease in unemployment of any racial group, going from 14.2% in April to 12.4% in May. Historically, the white unemployment rate is lower than the national unemployment rate, while black unemployment can be nearly twice as high. Hispanic Americans are still seeing the highest unemployment rate of any racial group, with a 17.6% unemployment rate in May, down from 18.9% in April.
The non-property crash
Property pressures may eventually come under pressure following income concerns, just not yet! Historically low interest rates, willing lenders and buyer demand is supporting the market.
Auckland's largest real estate agency, Barfoot & Thompson, sold 396 residential properties in May versus 552 in April and 821 properties in May last year. The agent received 1,097 new listings in May versus just 239 in April, which meant May's new listings were down just 7.5% versus May last year.
Prices were marginally softer with Barfoot's average selling price in May dropping to $947,707, down 4.6% from its March peak of $993,528. The median price rose from $900,000 in April to $914,000 in May but below its March peak of $925,000. Overall so far, the Auckland market's initial reaction to the COVID interruption has been uneventful. Sales are taking place but given the extended nature of the transfer process, are not yet showing up in completed sales data, and prices are not under pressure.
The rebound in residential property seen in Auckland post lockdown restrictions being removed appears to be spreading to the regions. Press are reporting Gisborne's housing market has emerged from the COVID-19 lockdown in buoyant shape, with 24 properties selling at a super auction held last week, with an impressive 80% clearance rate. A number of properties achieved prices well above the rating valuation. According to the auctioneer: "I've called hundreds of auctions and the activity was as busy as I've ever seen it.” He added: “The results that we are seeing in Gisborne are a good representation of what we are seeing across our 70 locations across provincial New Zealand.”
Amazon going with the flow
Some of the world’s largest and most profitable businesses are looking to secure an even stronger market position as a result of the COVID financial conditions. Amazon locked in some of the lowest borrowing costs ever secured in the US corporate bond market last week. The company raised $10bn in an offering that included 3-year notes carrying an interest rate of just 0.4%. Amazon had paid 1.9% on a 3-year note when it last tapped bond markets in 2017. In addition, the coupon on Amazon’s new 5-year bond matched a low set by the drug maker Pfizer in May, at 0.8%. Such favourable terms will help these mega-businesses in their respective strategies for market dominance. Whether that is ultimately in the best interest of the consumer is debatable.
01 June 2020
Tourism is significant for the New Zealand economy, accounting for 10% of GDP if one takes into account its impact on other industries. We are particularly exposed relative to other countries, and the outlook for the industry is challenging, even as we make great progress in eliminating COVID-19. Domestic tourism is getting underway again, but international tourism will be missing in action for a long time and is set for a slow recovery. This will weigh on incomes, spending and house prices, with some regions particularly affected. The Government is providing assistance, but pressure for more may increase, with business closures and job losses inevitable, especially since tourism is very labour intensive. Tourism receipts could fall by half this year. However, this could reduce to only a quarter if a trans-Tasman bubble were introduced. Overall, the blow to tourism could subtract 2.4% to 4.7% from GDP this year. Over the long term, the industry will reshape. But there's no denying that it is soing to be a tough time ahead for many.