Market & Portfolio Update - June 2020
Although remaining choppy, global share markets have continued to bounce back from the March COVID-19 sell-off. Investors have continued to focus on the re-opening of economies and the amount of stimulus that governments and central banks have been providing. While it would be premature to conclude that the world is out of the woods just yet, as shown by a pick-up in infection rates in parts of the United States, we remain focused on being adaptive during the fast-changing economic environment, and it is pleasing to note that the range of Booster’s core diversified funds have delivered moderate gains over the past 12 months despite the volatility that we have seen.
Booster’s NZ share investments gained over 5% in June. Alongside support from the Reserve Bank through quantitative easing, a large part of this performance was driven by Fisher & Paykel Healthcare, which manufactures respiratory health care products and has experienced a massive increase in demand for their products in the wake of Covid-19.
Returns also continued to benefit from active management within our global share investments, in particular from the allocation managed with California-based Fisher Investments. This includes holdings in a number of large global companies which have done well throughout Covid-19, including Chinese tech giant Tencent, Apple, Amazon and Netherlands-based semiconductor manufacturer ASML.
New Zealand’s Reserve Bank joins the ‘money printing’ club
You may have heard the term ‘quantitative easing’ lately, but what does it mean?
Quantitative easing is a tool used by central banks to stimulate the economy and money markets. This is done by central banks creating new money and using it to buy assets, typically government bonds. This pushes long term interest rates down, which lowers the costs of borrowing for businesses (encouraging them to invest) and lowers mortgage rates and the return on savings for households (encouraging them to spend). These two effects are both aimed to act as a boost to the economy. In the United States, Europe, the UK and Japan, central banks have been using quantitative easing to one extent or another going back to the global financial crisis.
In the past, the Reserve Bank of New Zealand has relied on directly setting short term interest rates through the Official Cash Rate (OCR) in order to manage the economy, however with the OCR recently cut to 0.25% they have now also turned to quantitative easing as a new tool to provide more support during Covid-19. The Reserve Bank plans to buy up to $60 billion of bonds over the next 12 months as part of this programme – a number that has already doubled from its first $30 billion limit, and may increase further.
Quantitative easing has a significant effect on the value of other financial assets as well. In response to lower interest rates on government bonds, investors may look to other financial assets in order to get returns. This increases the demand for assets such as shares and provides some support for returns.
The chart below shows the value of the NZX 50 index, the main measure of performance on the New Zealand share market, over the first half of this year. Since the Reserve Bank announced their quantitative easing programme, the NZ stock market is up over 24% and almost back to where it began the year (although still below its pre-Covid highs).
As well as showing the impact that quantitative easing can have (alongside the wider economic picture), this is also a reminder of the importance as an investor of sticking to an appropriate long-term savings plan. For many, 2020 has been anything but plain sailing, and some may have been tempted to sell their investments just at the wrong time. A disciplined investor however will likely be pleased to know that the value of a well-constructed, diversified investment portfolio has held up relatively well during these difficult times.
Recently, one of America’s largest life insurers (New York Life) did a survey of over 2,000 people to find out what they considered to be their largest financial mistakes, and how long it took to recover from them.