12 April 2021
The Findex Investment Committee continues to tread with caution as potential bubbles grow in certain sectors like technology. Asset valuations are high, which is characteristic of periods of low interest rates and low economic growth.
There is a prevailing global economic view that there is better growth to come with continued stimulus and money printing, which has investors “all in”. In terms of market risk, it is worth remembering we are at a complete opposite to last March when there was significant fear, but the risk of investing was much lower than it is currently with greed apparently taking over and market values high.
It is also important to note that whilst there have been recent comparisons made to the tech bubble of 2000, that occurred late in the economic cycle and was coupled with low unemployment and the US Federal Reserve trying to “tighten” (raise interest rates) policy. Current conditions are more conducive to markets rising, with the Fed applying “loose” policy (keeping interest rates low) and significant fiscal stimulus (Government support programs).
New Zealand impact of COVID-19
New Zealand was and still is, one of the leading nations when it comes to the initial and subsequent control of infection spread. A mantra of “go hard and go early” has served us well and continues to do so, where short and sharp ‘lockdowns’ are proving effective in quashing any infection flare ups. Whilst effective for virus control, the accompanying mobility restrictions have had a significant impact on the economy and unemployment.
The Government has rolled out several support schemes to help businesses. These have largely focused on assistance with employee related costs as a measure to save jobs and curb unemployment. Unemployment is trending downwards but there remains an elevated number of people on grants compared to 12 months ago. Combined with elevated underutilisation rates, this could signal it’s too early to call a complete recovery in the labour market.
Economic activity (as measured by GDP) bounced back strongly over Q3 2020, but a weaker than expected 1% decline in Q4 2020 shows we are not out of the woods just yet. There is still softness within our retail sector, with restaurants, bars and accommodation providers continuing to feel the pinch of closed international borders, especially during the summer months when international tourism is generally most popular.
The chart below illustrates the breakdown of that 1% GDP decline by industry. This clearly illustrates the dispersion in experiences being felt by different industries, something which is often not apparent by looking at the headline number. In a sentence, the local recovery has been and remains uneven.
Source: Stats NZ
Summary Asset Allocation views
Overall, we remain positive on growth assets relative to defensive assets over the medium to long term. Following the Q4 2020 rally, we are concerned around the levels of valuations but note that short dated bond yields globally remain close to zero, which supports elevated company valuations and provides a disincentive to invest in some bond assets.
We have seen signs of a fragile recovery taking place but highlight potential market headwinds in the form of high valuations. We are concerned that further risks could present themselves in terms of delays in the vaccine roll-out, as well as growing geopolitical risk, particularly between the US and China.
Improvements in earnings have been noted, but the level of earnings have not recovered to pre-COVID-19 levels. The economic recovery taking shape is beneficial for cyclical industries (e.g. banking, manufacturing, travel, construction), while low yields and low growth will likely continue to fuel a chase for yield.
Following discussion and deliberation, the Investment Committee made the decision to retain the current asset allocation. Portfolios today remain overweight Growth assets and have benefitted from the equity rally in Q4 2020.
Despite the benign environment, we remain concerned around the absolute levels of asset valuations and note that market sentiment and momentum may shift quickly.
The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Findex Advice Services NZ Limited.