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
Faster please, to avoid the void
As we all battle COVID-19, some spending is stopping, suddenly.
For many businesses it is like stepping into the void. Already in a few days New Zealand has over 27,000 wage subsidy applications. That is a lot and it’s just the start. Sadly, higher unemployment will happen as many of us battle in the grandstands against something we can’t see while we all wish the very best for our brave medical specialists at the front line....
How vulnerable is our housing market?
- Housing affordability continues to be a major challenge for many households. Initiatives to increase supply and to manage risks to the financial system have helped to contain house price rises, but they have not been able to hold the market back from strong price gains across the country. Our analysis had suggested that house prices could keep rising in the near term, supported by falling mortgage rates and a buoyant economy. However, risks of price declines are growing. The coronavirus outbreak has elevated the risks.
- The drivers of strong price gains over recent years have been positive migration, falling mortgage rates and strength in the jobs market. We see limited scope for these factors to add to housing market strength over the medium term. Coronavirus could be a catalyst for weaker prices if the economic impact is significant and unemployment increases.
- Prior to COVID-19 we had considered whether a housing market bubble might exist. We judged that this was not the case, although some traditional features of bubbles are apparent.
- Recently announced policy responses from the Reserve Bank of New Zealand and our Government are meaningful and we expect them to mitigate risks to a considerable degree. The key issues for housing will be the jobs market and whether any mortgage payment flexibility is forthcoming.
How this could be different to the GFC
- Headlines around COVID-19 outside of Asia have continued to worsen and, coupled with the oil spat between Russia and Saudi Arabia, have sharply reduced investment sentiment and created pockets of financial stress.
- While sentiment is clearly downbeat, we need to recognise that there is still a wide range of outcomes that can occur.
- In the event COVID-19 does result in recession, note all recessions have been different.
- While this volatility is unsettling, it is important to put this sell-off in historical context.
Harbour Outlook: Short term uncertainty reigns
- The spread of COVID-19 outside of China dented sentiment during February, causing global interest rates and equity prices to fall sharply.
- US political risk was elevated during the month, as polling and early primary results saw Bernie Sanders emerge as the frontrunner in the race to become the Democratic candidate for the US Presidency. He since has dropped to a clear second favourite, behind Joe Biden. Sanders is not considered a “market friendly” candidate due to his views on (anti) trade, plans to break up big tech and unconventional views on monetary policy.
- The US earnings season saw 491 companies report. 359 companies (73%) delivered earnings in excess of consensus estimates, with the best performing sectors being technology where 94% of companies beat expectations. The sectors which performed poorest were telecommunications (50% beat rate), and oil and gas (44% beat rate).
- In New Zealand, the December company reporting season was weaker than expected with more misses against expectations in results, versus beats. Company outlook statements were cautious. Consensus earnings forecast downgrades exceeded upgrades.
Surprise cuts necessary, but not sufficient
- Overnight, the US Federal Reserve executed an out-of-cycle 50 basis point cut as financial conditions have deteriorated sharply over the last week.
- The closed circuit of declining confidence driving lower risk appetite, leading to increased financial stress and back to declining confidence, can be broken by government fiscal policy and monetary policy stimulus.
- We expect a concerted global effort across governments and central banks to support economic growth. New Zealand will be part of that effort.
Monitoring the US leveraged loan market
Investors have their noses to the wind for the source of the next crisis. The terrifyingly titled pile of debt, known as “leveraged loans”, could be starting to pong. At Harbour we remain vigilant, monitoring the US market, but taking comfort in the structure of markets down under.
Leveraged loans are simply private market borrowing by sub-investment grade companies. The US leveraged loan marketplace provides well over $US...READ MORE
Harbour Outlook: Coronavirus contagion uncertainty
- The conflict between the US and Iran caused some market volatility but proved to be short lived.
- Activity indicators were generally stronger in January. US manufacturing, which had been an area of weakness, posted a strong print in early February, well above expectations.
- The US earnings season was very strong. At the time of writing, 320 S&P 500 companies have reported with 238 (74%) of those companies beating consensus earnings expectations.
- The outbreak of Novel Coronavirus (2019-nCov), a relatively less deadly but more contagious coronavirus than SARS, will have an impact on global economic activity due to cities being in lockdown and supply chains being disrupted.
- Interest rates and commodity prices have dropped substantially in response to the coronavirus outbreak. Equities, however, appear to have been supported by strong earnings and greater emphasis on the prior uptick in economic activity.