Change can mean new opportunity
In the Global Financial Crisis (GFC), the financial system came under significant financial stress, causing a severe credit crunch and household de-leveraging. It was a failure of the financial system.
But the Covid-19 recession is more like both a natural disaster and a market disruptor. It shocked financial markets, like a natural disaster, but that impact will be transitory. The correct response is what we are seeing – central banks cutting rates and governments assisting households and businesses to rebuild.
But it has also been a massive market and political disruptor. The acceleration of online and digitisation of business which has come from people being forced to, and then preferring to, work from home is an ongoing market disruption with massive, ongoing, permanent effects.
Similarly for governments, with global lockdowns creating need to provide financial liquidity and financial assistance and reassurance to entire populations. The fiscal (what governments spend) and monetary (what central banks do) policy response has been unprecedented, meaningful and lasting.
What’s happened in New Zealand?
In New Zealand, we have enacted so far around $60 billion of monetary stimulus (not including the benefit of rate cuts) and $62 million of fiscal stimulus accounting for over 42% of Gross Domestic Product (GDP). Why is this so significant? In previous recessions we would be lucky to have 5% of GDP in fiscal and the only monetary stimulus would be in the form of rate cuts.
How are our trading partners going?
Here is a table of pledged fiscal stimulus from key trading partners:
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Fiscal $ (CCY bin)
Fiscal as % of GDP
ECB & Europe
Source: International Monetary Fund, correct as at 30 June 2020
In terms of monetary stimulus, the US Federal Reserve has also provided US$5.7 trillion so far. With a commitment to do whatever it takes.
If you want to know why the share market has reflated so fast, it’s because investors can see we have money pledged for the economic rebuild.
The impact on households
Another consequence is the household savings rate has surged around the world (for example from low single digits to 16% in the US) as fiscal stimulus has found its way into consumers’ hands at precisely the time when they haven’t been able to spend it. Eight and, in some cases, 12 weeks of enforced (lockdown) savings means households have pent-up demand to help re-start the global economy.
Households have also benefited from reduced living costs, including petrol prices and mortgage rates. With the average mortgage for first-home buyers around $400k, the lower borrowing costs should deliver at least $4k a year in savings – and higher for those who are rolling off older fixed-term rates.
Term deposits drop
The bad news of all this additional stimulus is the return on cash is approaching zero, where it has been in Europe for the last decade. Banks are now flush with cash (which is good news by the way) and they no longer need to offer attractive rates on term deposits. This means Kiwis who have relied on term deposits for income may start looking elsewhere, like towards riskier assets.
Gold’s back in favour
Gold is going through another renaissance. After running to US$1,800 an ounce post-GFC on inflation fears, it retreated in the years between recessions. But with rates back at zero and concerns about the long-term consequences of more and more debt, gold is back in favour and has touched fresh highs again this month.
Stimulus and second-wave fears
We now must think about investing in a landscape where stimulus is driving asset prices and the consequence is
a renewed focus on assets with growth and those of safer haven.
So, what about the second-wave fears and the current vertigo share investors are experiencing? Governments have committed to the current course of stimulus and more is likely to be announced globally in the coming months, including further extensions of the wage support schemes. With elections looming it would be political suicide to cut people off at this juncture. My point here is if you are expecting shares to fall back to the March lows later this year, the chances of this occurring are reducing. We either steadily recover out of Covid-19 and the situation keeps improving (like a rebuild after a natural disaster), or things get worse (more aftershocks) and more stimulus is applied until we eventually do recover.
• For those who missed the update, we’ve realigned our products to help better categorise what they invest in, and you’ll notice some funds have name changes. The Australasian Growth Fund has also closed. This was the Fund I started Pie with, so it’s a real milestone to see it reach the $100m level and capacity. If you have any questions, please contact your Relationship Manager.
• In other news, JUNO investing magazine has been sold. Clients will no longer receive printed copies of the magazine and will instead be emailed a digital copy.
The core focus at Pie Funds continues – to provide long-term returns to clients. We retain the JUNO KiwiSaver Scheme business.
As always, thank you for your support. If you have any questions please don’t hesitate to call me on (09) 486 1701, or email me, [email protected]
Mike Taylor, Founder and CEO
Past performance is not an indicator for future performance. This is not intended to be financial advice and does not take into account any particular person’s circumstances. Before relying on this information, please speak to an independent financial adviser.