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Investment Committee Updates

25 May 2020

Trade tensions return

Around this time a year ago, before there were supermarket queues, bubbles and clusters, the economic world was preoccupied with US-China trade tensions and pro-democracy demonstrations in Hong Kong.

Over the last week all of those old tensions returned. The imminent timing of the US election has seen Trump deflect attention of his own criticised response to COVID-19, towards China's initial handling of the outbreak.

An Australian-European backed call for an independent enquiry into the outbreak resulted in an immediate Chinese response that has imposed trade sanctions on Australian barley, beef, iron and coal exports. 

Currency response

The escalation in trade tensions saw the Australian dollar come under pressure and our own currency continue to languish around $0.60. The outlook for New Zealand's agricultural sector continues to remain positive and the low kiwi dollar should enhance the country's export competitiveness.

The flip side of our lower dollar is the higher prices paid for imported goods, many of which are inputs into our export production. New imported machinery becomes more expensive which risks squeezing already tight business margins and puts further pressure on jobs. 

Periods of a weaker New Zealand dollar have historically correlated to lower, not higher economic output. And importantly, this time around we cannot count on a wave of tourists coming here to take advantage of cheaper New Zealand holidays.

Currency is a bit like Goldilocks porridge. We neither want it too hot nor too cold. A return towards $0.65 will make for happier economic bears.

New world voice

China's concern over the optics of the virus is nothing new. Major economies have a long history of wanting to control the narrative to suit the image they wish to portray, whether it is China today, the US over recent decades, England of 100-200 years ago or even the Roman empire 1500 years before that.

Perhaps the industrial pause during various lock-downs around the world, where the pace of life slowed and the air became cleaner demonstrates the we should aim for a new equilibrium of activity as economies progressively re-open. A town in northern India now has its first clear view of the Himalayan mountain range in nearly 30 years - and the mountains which include the world's tallest Mt Everest are just 200km away. 

COVID-19 has taught us that having a clean economy and sense of community is more important than producing more billionaires. 

New Zealand was a strong voice in the world with its anti-nuclear stance in the 1980s. Given the early success we have had in managing covid to date, we may again find our global voice is far greater than our nations physical size.


18 May 2020

What is a government budget?

The country has re-opened under level 2 conditions to a new government budget that has been adjusted for the challenging economic environment ahead. Just as your household budget is all about what you earn and spend, similarly the government budget is a statement of its income and expenditure. A government budget is an annual financial statement showing item wise estimates of expected revenue and anticipated expenditure during a fiscal year. Normally governments try to balance their budgets or to run a budget surplus. A balanced budget is a budget in which revenues are equal to expenditures. 

What is so special about this budget?

This budget will attempt to save jobs and businesses and get the economy growing again. It is an example of what is called expansionary fiscal policy. This is used to helpo get a country out of a recession, when there is unemployment, suplus saving and falling real output. Expansionary fiscal policy is usually financed by increased government borrowing and selling bonds to the private sector.

Increasing investment in public work schemes is a way that government spending creates jobs, increases incomes and leads to greater aggregate demand in the wider economy. This injection of money into the economy can also cause a positive multiplier effect. For example, builders who gain a job will also spend more in turn helping create jobs elsewhere in the economy. The aim is that from the government's initial spending injection, the final increase in real GDP will be more than the initial investment.

Key 2020 budget features

The government is certainly going hard, with the biggest spend in New Zealand history.

The centrepiece of the budget is the establishment of a $50bn Response and Recovery fund. The Government has significantly expanded its COVID-19 economic support and recovery package, bringing it to a combined $62bn or around 20% of annual GDP. 

The government will spend $900m to support whānau, hapū and iwi to deal with the fallout of COVID-19. The package includes $400m on Māori education, a $137m boost to Whānau Ora, and $200m on a Māori Employment Package targeted at the regions. The Budget recognises the significant impact of the virus on Māori, particularly in terms of unemployment where Māori are already over-represented.

There will be an extension of the wage subsidy scheme for an additional eight weeks, for those firms that can show a 50% loss of revenue. The previous threshold was a 30% loss. Tourism and hospitality firms are the most likely to meet this threshold.

Infrastructure investment has been allocated $3bn, which is in addition to the $12bn announced earlier this year and the $3bn provincial growth fund which will remain.

The budget will continue a rapid expansion of the public sector in areas such as housing, trades training, school lunches, environment and conservation, in addition to further investment in the usual public services of health, education, transport and security.

But being bold can be risky. This could saddle future taxpayers with onerous debts. If interest rates were to unexpectedly rise, the debts being taken on today could become a very heavy burden to future taxpayers. The need to reduce the debt burden in the future may mean future higher taxes and lower spending down the track. These decisions will dominate political debates going forward.


04 May 2020

Cars

NZ cars sales in March were a third lower than at the same time last year. April will be lower again.

It would appear to be a buyer’s market aided by rental car companies sitting on far more vehicles than they need as overseas tourists account for over 75% of car rentals. Rental car companies typically either lease or buy their fleets from manufacturers with an agreed resale price. Under current conditions such contracts may be voided.

Either way, expect to see a whole lot of near new well maintained vehicles about to hit the market. Don’t expect to get too much as a trade in on your current vehicle as those prices will fall also. What may support the market is more people seeking vehicles as an alternative to sharing public transport with others. And what does this say for the future of Uber or shared vehicle drive-and-park schemes? Perhaps many will find shared services less appealing compared to the flexibility, safety and security of having your own vehicle.

New vehicle production globally for the rest of this year and into 2021 is also likely to be scaled back through vehicle production being halted during year and reduced perceived demand for new vehicles over the next few years.

The New Zealand Business Bolthole

Stories of overseas billionaires having bolthole homes in NZ is not news. However, the success that NZ has had in flattening the covid.19 curve and moving to reopening has seen talk of overseas businesses having a NZ bolthole contingency.

That is as one commentator described it: “fly over your team, spend two weeks in quarantine, don't even think of dodging our taxes, commit to staying at least a year, hire some local staff, set up in a little Eden with WiFi, and resume life with work meetings and schools and cafés as if the global nightmare never happened. Then see if you ever want to go home again.”

The new demand is for a safe haven from Covid-19 and similar future pandemics. The ideal for many westerners would be an English-speaking democracy with a developed economy, lots of space and nice weather, though not so hot that it catches fire in summer.

The demand for such spaces may also fall outside of the larger population centres, due to both cost and wanting to avoid congestion. The provinces may win out here.

Technology Trends

We are seeing emerging trends in technology and innovation. The following is not personal advice to invest. Just some general views.

Those companies that have an established digital distribution network or infrastructure have come through the start of 2020 in good shape. Amazon was already a massive company but its online trading ability and systems technology that it on sells to other tech companies has seen its share price well supported. Netflix with its large library of online content has been one of the companies whose share price has risen through the pandemic. It is now the same size as Disney. Not too bad for a company only established in 1997. And Zoom who provides video conferencing, established in 2011 now has a market value over 2 times higher than NZ’s largest company.

This will be a most interesting technology and investing period ahead.


28 April 2020

Oil

The demand for oil is 30% lower than this time a year ago. As global travel and trade slows so does oil consumption. Last week the price of US oil futures traded briefly below $0 as storage facilities for oil filled up. With limited storage available they were essentially paying people to take the oil.

Global oil prices have also fallen but not into negative territory. At US$22 per barrel oil prices are uncomfortable for oil producing nations. Saudi Arabia can make money when the price per barrel exceeds US$20, and Russia can at a price of US$40. Saudi Arabia has a highly subsidised economy and requires US$80 a barrel to balance its budget. The stability of both the Russian and Saudi Arabian political systems and current regimes becomes vulnerable when oil prices are low.

Low oil prices do not proportionately translate to lower petrol prices for NZ drivers when filling up their vehicles as under 1/3rd of the NZ petrol price is for refined fuel. The rest is made up of taxes, shipping and profit margins. So a 30% drop in oil prices may only result in a 10% drop in the price at the pumps. Include a lower NZ dollar into the mix and the fall in petrol prices may only be closer to 5%.

Office space

The work-from-home where possible orders may change or usher in faster change to many workplaces. Post-Covid-19 there will be a reappraisal of many workplaces. They may be smaller, with proportionally more space allocated to meeting rooms and social areas, and more hot desks for workers who happen to be in the workplace rather than working at home as they normally would.

We may see an inversion of the traditional workspace, with offices becoming the place employees come once a week to socialise, meet co-workers and attend team or client meetings, and the work itself being done elsewhere.

There will be implications for the demand for office space. The nation’s high-rise city centres are mainly constructed from steel, concrete and glass. These are three of the most energy hungry materials in the world. Is an office building like this good stewardship of our dwindling resources?

Furthermore, densely packed buildings will remain vulnerable to future risks of infection.

Product substitution

The coronavirus is reshaping lifestyles as the world’s top consumer-products companies report rising demand for laundry detergent and mayonnaise and a pullback in personal-care items like deodorant. Consumers are cooking and cleaning more while spending less time and money on grooming and makeup as a picture emerges of how the coronavirus is reshaping lifestyles.

The question now is which behaviours will stick and which will fade when restrictions to fight the pandemic are lifted.

Another important behaviour change is the current level of product and brand switching. Up to 40% of consumers have been trying new brands and products. Almost half of these consumer switches are because the desired product is unavailable, while an additional 19% decided to purchase cheaper available options. Of the consumers who switched brands, 12% expect to continue to purchase the new brands after the pandemic. In the coming economic environment we may see an overall flight to value goods. As a result, it will be important for manufacturers to refine their production across categories to ensure they have the right product offerings and strategies in place to make up for lost market share from customers who trade down.

 


20 April 2020

Unemployment

The NZ Treasury estimates that coming out of the current level 4 lockdown after one month, followed by another month of level 3 and ten months at levels 2 and 1 will see GDP drop by around 5% and unemployment peaking at around 8%, but only because of the government's NZ$12 billion rescue package. The guidance on April 20th essentially adds another week to the level 4 restrictions used in Treasury’s analysis above but potentially reduces level 3 restrictions by 2 weeks, so is roughly unchanged.

This will still make it far worse than the recession that followed the 2008 global financial crisis, when NZ's GDP declined by 2.2% and unemployment peaked at 6.9%. Economic growth should recover by varying degrees in 2022 but will be dependent on many currently changing and uncertain variables.

Inflation

Expectations are that inflation may be low this year but will potentially rise next year. Even with very low interest rates likely to be around for years to come, the outlook for the traded goods sector is uncertain. For many years, cheap goods from offshore have kept our overall inflation rate low, in the face of rising local food and labour costs. In a covid.19 recovering world, economic production and distribution may be hampered. Producers may be reluctant to make items in large quantities to avoid the risks associated with unsold stockpiles. More limited production could lead to scarcity which would see prices rise.

The dilemma of the cost of life

Life is priceless, but there are practicalities to how much money is available to governments and health agencies to apply to any single crisis. The social and political desire to fix any new health crisis is often immediate and deemed essential.

The dilemma is what the consequences of the resulting economic and wealth austerity have on funding other important aspects of health such as delayed treatment for pre-existing ailments, the onset of depression and loneliness though isolation and increased risk of domestic violence.

An estimate of up to 30,000 operations have been delayed by covid.19 conditions. It is also likely there have been delays in diagnosis, partly because people had been avoiding general practices and emergency departments. Balancing restarting the economy without undue risk to more lives from covid.19 will be a delicate process.


13 April 2020 

Tourism

Border controls could be in place until a vaccine is ready, which has been estimated as 12 to 18 months away. Border measures are unlikely to be relaxed unless other countries, as well as New Zealand, managed to eliminate the virus.  This means that international tourism as a revenue source will disappear from NZ for 2020 and may not return until the Summer months at the end of 2021 at the earliest.

The impact on our economy will be significant. Total annual tourism expenditure is $40.9bn, or $112m per day. International tourists spend $17.2bn of that or $47m per day.  The balance is NZ domestic tourism of $23.7bn, or $65m per day.  It may surprise many to know that domestic tourism has the larger revenue share.  With NZ tourists also unlikely to travel offshore over the coming period, effective marketing to this group will be crucial.  However, tourism will be an increasingly competitive market as more households will have reduced budgets for travel and recreation.

Businesses getting ready for re-opening

The decision to move to Alert Level 3 at the end of the designated lockdown period of 28 days will be made on April 20th.

For business operators, the Prime Minster has indicated that the following three factors will be crucial:

·       Working in an environment that still ensures social distancing

·       Your ability to supply the Government with contact-trace information for all the customers/employees you work with

·       Whether your business will need Personal Protective Equipment

The balance of 2020 is likely to be a challenging operating environment. Businesses that plan early and implement their updated trading strategy in a timely manner will be best placed to endure.

Your personal finances

Many households will be in for a tough economic time over the next two years. Whilst it is ideal to have financial reserves, particularly going into a bit of a crisis, the reality is that most people do not, as modern life in general is expensive. This is however not the time to get caught up on what may have been.  The reality is that we can only look forward.  The majority of people will take a financial step backwards for a while before eventually moving forwards again.  You are definitely not alone.  This like all seasons shall eventually pass.

The economic environment we are entering is challenging but is beyond our individual control. We encourage all to make use of the support services available.  And if you have a mortgage or are carrying credit card debt, talk to your bank if necessary.

And importantly, talk amongst your household. The current situation is unprecedented during most of our lifetimes. Share and be open. There is no disgrace with what is going on.

We will all probably need to be more prudent with our spending at the moment, so some good old fashioned budgeting will be necessary. We do need to keep in mind that one person’s spending is another person’s income but it will be important to set priorities.

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