Negative rates – An option for the RBNZ, but not its preference
- The RBNZ continues to entertain the idea of a negative Official Cash Rate (OCR) to provide additional economic stimulus
- There is global precedent but the associated lower policy efficacy and financial stability risks cause much debate
- A negative OCR cannot be ruled out and keeping the option open is likely helping to anchor short-term interest rates and the NZD
- The RBNZ’s revealed preference for QE, however, is clear and an expanded Large Scale Asset Purchase (LSAP) programme remains most likely if further stimulus is needed
Large Fiscal Spending Promises
- Budget 2020 revealed larger-than-expected potential spending in response to COVID-19.
- However, detail was lacking on many spending priorities.
- The accompanying larger bond issuance programme may prove difficult for the market to digest, placing upward pressure on government bond yields.
Harbour Outlook: Bounce back
- COVID-19 infection rates have slowed in most countries with some positive news on potential treatments and the fatality of the virus.
- Equities bounced back strongly digesting positive COVID-19 news flow alongside large scale monetary and fiscal stimulus.
- US earnings season has kicked off with the results to date above expectations, albeit earnings expectations have fallen in recent weeks. Technology and healthcare companies have led the way.
- The action of central banks saw interest rates fall over the month. They are likely to remain low for some time.
Will RBNZ QE help bridge the gap and how does it work?
What is the Reserve Bank of New Zealand’s (RBNZ’s) Quantitative Easing (QE) programme?After cutting the Official Cash Rate (OCR) by 75bp to 0.25% on March 16th, the RBNZ launched its Large Scale Asset Purchase (LSAP), or QE programme, just one week later. LSAP has a target to buy $30bn of government bonds over the next year; equivalent to 10% of Gross Domestic Product (GDP) and, at the time, almost 50% of outstanding bonds ma...READ MORE
Ethical investing: walking the talk
In recent times, perhaps more visibly prior to COVID-19, it has been satisfying to see growing interest in, and demand for, ethical investment products. Ethical is the term most often used by New Zealand investors, whereas fund managers like Harbour use terminology such as “ESG” (Environmental, Social and Governance) and others might refer to “Responsible Investing”.
Taxonomy issues aside, what one investor considers ethi...
Listed Property – Known knowns, and known unknowns
- Listed property assets have not yet fully recovered.
- Diverse impact of COVID-19 may create investment opportunities.
- A wide range of outcomes are possible, and we review current evidence on rental abatements and deferrals.
- It is reasonable to assume rentals falling by between -5% for industrial assets, through to -20% plus for secondary retail malls.
- Banks have been supportive refinancing and extending debt facilities.
QE in New Zealand – A rising tide lifts most boats
- The RBNZ’s quantitative easing (QE), Large Scale Asset Purchase (LSAP) programme has kicked off to a very promising start.
- In a tug-of-war between massive Reserve Bank purchases and NZ Treasury issuance, the Reserve Bank is winning.
- The New Zealand Local Government Authority raised $1.1billion in new bonds issued today – a record amount.
- Along with better COVID-19 news in New Zealand and a rebound in equities, we are starting to see better activity in high grade NZ credit.
- The market is hoping this will flow through to the broader credit market. Early signs are encouraging, but the jury is out on the poor cousins at the lower end of the credit spectrum.
Panic doesn’t pay: Tips from professional investors
Harbour’s investment team has decades of experience in managing Australasian shares and New Zealand bonds. Whilst over time, investors generally experience favourable market conditions allowing us to generate positive returns, it tends to be the downturns that people remember most. The table below illustrates this, as New Zealand share market returns were positive for around three quarters of the years shown:
Harbour Outlook: At Home
- COVID-19 continues to spread globally with cases recently reaching over 1 million.
- Governments and central banks’ stimulus measures are helping mitigate the impacts of a sudden stop in economic activity.
- Equities posted losses as investors digested the impact of reduced economic activity on company profits, while bond yields in many countries rose as investors baulked at the large increase in bond supply which is required to fund expanding government deficits globally.
- Russia’s refusal in early March to back an OPEC production cut resulted in Saudi Arabia dramatically increasing supply to “punish” the country. Combined with reduced global demand, oil prices have fallen more than 50% year to date.
COVID-19: Building the bridge across the void
- Extraordinary global fiscal and monetary policies are starting to build a bridge across the void
- Markets are beginning to look beyond COVID-19 case trends, and towards solving the pandemic with tests, a new standard of care and vaccinations
- Quality companies, with strong balance sheets, are performing well
- This is a time to stay at home and be kind, it is also a time to pay close attention to discipline in investment decisions