Investment Market Commentary 

The December quarter was the third consecutive quarter where equity markets rallied from their March correction and significantly outperformed fixed income. Emerging markets[1] returned 19.7% while US equities[2] returned 12.1%. NZ small-cap companies[3] delivered a stellar return of 21.7% and outperformed the broader NZ equity market[4] which gained 11.4%. Despite an increase in wholesale interest rates, New Zealand listed property[5] returned 8.5%, albeit under-performing the broad market. Global bonds[6] eked out a positive return of 0.8% while NZ bonds[7] returned -2.2%.

The US presidential election in November, which was a key market risk for the better part of 2020, showed a clear outcome with Democratic candidate Joe Biden winning the presidency. Expectations that a Biden presidency will smooth US relationships with traditional partners boosted markets. The post US election boost to risk assets was then accelerated by rapid progress from phase three vaccine trials by Pfizer/BioNTech and later by Moderna. Markets took the vaccine news as a game changer for the pandemic, representing a light at the end of the tunnel despite uncertainty around the complexities and challenges of an unprecedented global vaccination roll-out.

New Zealand’s economy finished the year in a stronger position than had been anticipated, with the latest economic data showing that the domestic economy was slightly above the level we saw prior to COVID-19. Headline consumer price inflation data for Q4 2020 exceeded market and the Reserve Bank of New Zealand’s (RBNZ) expectations. Similar to other regions, the rebound in demand has caught the supply-side out, resulting in shortages and price rises in a few key commodities and consumer goods. NZ’s housing market data for December indicated that the REINZ house price index had gained 17.3% yoy to a record high. Given these developments, there appears to be little incentive for the RBNZ to cut rates further or add additional monetary policy support at this time.

After delivering extraordinary returns in 2020, equity markets took a breather in January amid a rise in volatility, particularly in the last week of the month. This was despite the results of the Georgia Senate runoff which gave the Democrats control of the US Senate and opened up the prospect of significantly larger fiscal stimulus (US$1.9 trillion). A handful of heavily shorted stocks went on wild rides as large numbers of retail speculators banded together on online forums and took on sophisticated Wall Street funds to unleash a historic squeeze[8]. The ensuing market turmoil in turn prompted a wide array of investors to temporarily curb risk appetite.

While new vaccines should eventually allow us to exit this pandemic, the path to recovery may still be bumpy over the coming quarters, as success will depend on the willingness of the population to get vaccinated and the effectiveness of the vaccines against any virus mutations. We are therefore likely to have periods of positivity and moments of disappointment, all of which point to potentially elevated market volatility over the coming months. The current low interest rates, accommodative stance from policymakers and expectations of further fiscal support continue to be key support drivers for risk sentiment over the medium term.

More than ever, the emphasis will have to be on identifying the regions, sectors and companies that have the strongest underappreciated earnings prospects, while ensuring that your portfolio is well-diversified across different asset types, securities and investing styles. For example, since the positive vaccine news, performance within share-markets has started to shift, with cheaper, smaller and more cyclical companies out-performing, given they would benefit most from a return to more normal economic activity. Investing across a range of assets can help minimise risk in the short term and leave you better placed to achieve your investment goals. If you are concerned or unsure around the risks your investment portfolio is exposed to, speak to your financial adviser.

[1] MSCI Emerging Markets NTR Index (USD)

[2] S&P 500 Total Return Index (USD)

[3] S&P/NZX Small Companies Gross Index

[4] S&P/NZX50 Index Gross

[5] S&P/NZX All Real Estate Gross Index

[6] Bloomberg Barclays Global Aggregate Index (100% Hedged to NZD)

[7] Bloomberg NZBond Composite 0+ Yr index

[8] A short squeeze occurs when a stock jumps sharply higher, forcing traders who had bet that its price would fall, to buy it in order to prevent even greater losses and their scramble to buy only adds to the upward pressure on the stock's price.