December Market Commentary

Reflecting on a year to forget

Remember in January 2020 when things were looking great and we were expecting a year of growth driven by fiscal support? How right we were, just not in the way we anticipated!

How the year started:

  • 4th January we started hearing about 44 cases of pneumonia in China.
  • 11th January China releases the genome sequencing for the novel coronavirus. We believe this is a localised virus and nothing too serious to worry about.
  • 23rd January the World Health Organisation visits Wuhan in China (a city the world knew nothing about at the time). NZ government sets up a team to monitor this development.
  • 30th January the WHO declares a health emergency of international concern. The world watched with some interest and then changed the channel.
  • 3rd February NZ placed 14-day self- quarantine restrictions on people who are from or travelling through China.
  • 11th February coronavirus gets a new name – Covid-19. We hear of transmission of the virus to people who had not been to China. The world starts to get nervous.
  • 24th February as Iran now struggles to contain the outbreak we watch as the Iranian deputy health minister presents that Covid-19 is under control and nothing to be to be concerned about. He starts coughing on stage and later that day is diagnosed with the virus.
  • 1st March the NZ government extends the self-quarantine restrictions to include any travellers from northern Italy and South Korea. At this point it is already too late.
  • 11th March two months after the first whisper of Covid-19 the WHO declares an official pandemic.
  • 14th March the NZ government extends the 14-day self-quarantine restrictions to all people arriving into NZ.
  • 17th March global share markets finally pay attention to this and start declining. Share markets will go on to have the steepest and deepest decline and fastest recovery in history.
  • 17th March on the same day as the markets start going down the government announces a $12.1 billion package (4% of NZ GDP) to help businesses and hospitals. This will grow to be $100 billion or 35% of NZ’s total GDP.
  • 21st March the NZ government implements a four-level alert system and puts NZ at Level Two, stopping gatherings above 100 people and several other minor restrictions are implemented.
  • 23rd March the NZ government raises the alert level to Level Three two days later. We are told to stay at home if we can, and the hoarding of toilet paper and flour starts.
  • 25th March the NZ government moves to Level 4 and New Zealand goes into the first full lock down in history. This lock down will last for four weeks.

The rest as they say is history, but what an incredible eleven and half week period this was for us all!

Uncertainty reined in March

As we progressed through these different stage’s, forecasts were coming from analysts all over the world that were dire and suggested that the 30% decline we saw in share markets in March was likely just the beginning of something much more serious.

One of the areas that PWA advisers were watching with some trepidation in March and April was the spreads (margin above the risk-free rate) rising. In the table above you can see spreads increased over 6% in the month of March (bond prices fall as interest rates rise).

US High Yield corporate bond spreads


We also saw spreads increase on investment grade bonds, and the yield on the risk-free rate (US 10-year bond rate) even moved higher as investors sold the bond to realise capital. These moves meant that bonds did not provide the usual protection in the March share market sell off. Instead their prices also fell.

The global slowdown of GDP

As the developed world went into lock down in March, China was already starting to return to business as normal. From the start of this year to September 30th we have seen Gross Domestic Production drop by around -4% for most developed countries.

Due to China being one of the first countries to re-open and their stringent controls around the spread of the disease, their GDP is +3.2% for the first three quarters of 2020. Australia on the other hand has seen a -6.6% contraction in their GDP since the start of the year. Australia’s GDP is worse than New Zealand’s (-4.8%) due to their repeated lock downs.

The UK has had the worst GDP contraction of the developed world year to date with -9.7%
since the start of 2020. This was due to the UK getting hit harder by the pandemic leading to their GDP contracting -19.8%
in Q2 of this year before rebounding 15.5% in Q3.

Country GDP – Q1 to Q3 2020

Source: OECD. NZ and Australian Q3 GDP is a forecast from ANZ Research.

So how did the market deal with the largest lock down of humans in history?

In March this year the level of uncertainty around how this ‘pandemic driven sell-off’ was going to play out was at record highs. Within PWA’s portfolios our absolute return focused fund managers moved to record high allocations in cash, with some shorting the markets. This behaviour along with the high level of term deposits we were holding across our client portfolios provided significant downside protection allowing them to quickly recover their original capital values.

The March sell off was one of the fastest in history, and (once the central banks stepped in with unprecedented levels of quantitative easing) has also been one of the faster recoveries in history. As shown below the US S&P500 and New Zealand NZX50 had the smallest falls and have been the fastest to recover with the Eurozone and Australia been the slowest.

Global Indices (local currency) – ending Oct 2020

Source: Bloomberg, ANZ Research

The market recovery was driven in large part by the unprecedented levels of monetary (QE) and fiscal (helicopter money) stimulus. The US Fed’s balance sheet went from US$4.15 to US$7.2 trillion mid-November 2020, with a total of US $7 trillion combined developed world QE having been printed in 2020 alone.

Globally debt across all sectors (public and private) has increased by just under US$20 trillion with the global debt to GDP ratio rising from 330% at the start of 2020 to over 360% at the end of October.

US Fed Reserve Balance Sheet

Source: Fed Reserve, BEA, Haver Analytics, Morgan


Global Det tops US$272 trillion

Source: IIF, BIS, IMF, National Sources

Stanley Research forecasts

Interest rates move below 0%

Global central banks are printing funds and using them to buy bonds, both government and corporate, removing a large portion of the global bond market usually available for investors. The reduction in supply and the higher demand has pushed bond prices within the developed world higher, especially in the short dated (1 – 5 year) maturity range.

This supply/demand variance has led to the new record of US$17.5 trillion worth of global debt (private and public) trading at yields (return to maturity) below zero percent. At present it is forecast that interest rates will stay low for the next 24-months, indeed the US Federal Reserve has indicated as much.

For investors that are holding benchmark aware global bond funds they are now carrying an increased level of risk versus back in 2007. This is due to the yield from the Barclay’s Global Aggregate Index being at 0.88% gross p.a. and the duration (average maturity date) being 9.13 years (as at the end of October 2020).

Global Negative Yielding debt (US$ T)

Source: Bloomberg, The Daily Shot


Largest two-week flow into global shares ever

Source: The Daily Shot


TINA stands for “There is No Alternative”. This acronym is being used to explain why share markets are continuing to push through new record high levels. The acronym means that investors are moving into shares in a greater number as there is no alternative to investors hungry for positive yielding investments. As shown above the week ending 22nd November saw the largest two-week flow of funds into the global share market.

Since the start of the year “Zombie Companies” (companies unable to produce sufficient revenue to cover their borrowing costs) have seen a large level of funds flow which has meant that these unprofitable companies have outperformed the S&P500 since the start of 2020. This is suspected to be from retail investors coming into the markets using free or cheap trading platforms.

Zombie companies’ outperformance the S&P500

Source: BoA Global Investment Strategies, EPFR Global, Daily Shot

What is the Reserve Bank of New Zealand up to?

Post the first lockdown in NZ, the Reserve Bank of New Zealand (RBNZ) started their own version of Quantitative Easing (QE) called the Large-Scale Asset Purchasing Programme (LSAP). Initially, this was limited to NZ$30 billion but has since been increased to $100 billion and extended to June 2022.

Currently, the official cash rate (OCR) in NZ is at 0.25%. The RBNZ has also reduced this alongside lower local government bond yields to reduce borrowing costs and stimulate growth in the NZ economy. Most economists are forecasting the RBNZ will take the OCR into negative territory in early-2021, although this is not a forgone conclusion as New Zealand’s economic data is recovering faster than most forecasters expected.

At present, the RBNZ owns around 37% of the total NZ government bonds available – up from 6% at the start of 2020. This is forecast to increase to more than 50% of all the NZ government bonds by the end of this programme in 2022. These are truly unprecedented times.

ANZ is forecasting that New Zealand’s economic recovery will start to stagnate as we head into 2021. They forecast that the RBNZ will cut the OCR by 0.15% in May 2021, and again in August as data continues to be negative, with the OCR likely to move to -0.25% sometime in the third quarter of 2021.

RBNZ Bond Ownership – to rise above 50%


Source: Bloomberg, BOJ, RBNZ, FED


ANZ’s OCR Scenarios for 2021

Source: ANZ Research

Below is an excellent flow chart showing the three different levers the RBNZ is pulling and the expected impact on different parts of the local market. LSAP is the Large-Scale Asset Purchases (QE), OCR is the Official Cash Rate and FLP is the Funding for Lending Programme (RBNZ lends money directly to NZ banks).

ANZ’s – How does monetary policy usually work?

Source: ANZ Research


NZ property

The QE and fiscal stimulus that the RBNZ and offshore central banks have been undertaking has impacted NZ mortgage rates with the 1-year mortgage rate expected to bottom out at 1.75% in April 2021. It was 3.44% in January 2020.

If we assume in January of 2020 a borrower wanted to buy a house with borrowings of $1 million, and we assume the mortgage is over 25 years, at an interest rate of 3.44%, the borrower would be paying $60,279 p.a. in principal and interest payments. If we keep the repayments at the same level and drop the interest rate to 1.75% the sum that can be borrowed increases to $1.21 million (or by 21.2%).

This decline in interest rates is one of the main reasons for house price increases over the last two decades. Given this it is unsurprising that, according to data from the REINZ we have seen the median house price across New Zealand rise by 19.8% y.o.y to the end of October. There are of course other factors impacting prices to some degree such as catch up from the Covid lockdown, supply/demand, and offshore investors. However, the reality for New Zealand property owners is that if interest rates were 1% or 2% higher most mortgage holders would likely struggle to pay their mortgages. If we use the example above where the person has borrowed $1.21 million and we assume interest rates have moved back up to 3.4% as they were in January, the repayments increase to $73,067 or rise by 18%.

NZ Mortgage Rate Forecasts

Source: ANZ Research


New home listings lagging

Source: ANZ Research

With mortgage rates forecast to move lower and stay low for the next couple of years it is unsurprising that Westpac is now forecasting a 13% increase in NZ property prices in 2021, and a further 6.5% in 2022, with house prices declining from 2024 (-1.8%), 2025 (-3.9%), 2026 (-2.0%).


The impact of Covid on economies, and the change in Central Bank policies to push interest rates to record low levels has poured fuel on many (already) overpriced asset classes. This is now expected to continue for the next couple of years – however if we follow the path of the Japanese it could be as long as 10-years.

If and when any asset bubble bursts is anyone’s guess. We will need to remain nimble and continue to monitor the markets closely. The one thing we can be sure of is that no one knows how this cycle will play out as we are largely in uncharted territory in a world of zero to negative interest rates.




Private Wealth Advisers believes the information in this publication is correct, and it has reasonable grounds for any opinion or recommendation found within this publication on the date of this publication. However, no liability is accepted for any loss or damage incurred by any person as a result of any error in any information, opinion or recommendation in this publication. Nothing in this publication is, or should be taken as, an offer, invitation or recommendation to buy, sell or retain any investment in or make any deposit with any person. The information contained in this publication is general in nature. It may not be relevant to individual circumstances. Before making any investment, insurance or other financial decisions, you should consult a professional financial adviser. This publication is for the use of persons in New Zealand only.