The year 2020 is now behind us but is unlikely to be forgotten. As the year begins there are several big questions facing investors.
- What does a COVID-19 recovery look like?
The biggest uncertainty right now is around the timing of the recovery from the effects of COVID-19, both globally and within New Zealand.
Health recovery - The most significant issue with COVID-19 is its impact to people’s health, with a recovery depending on the roll-out of effective vaccines. To date this roll-out has had varied levels of success. While the UK was one of the first countries to approve the vaccine, it has entered another stringent lockdown which is likely to continue until early March. The US was targeting 20 million people vaccinated by the end of 2020, but only managed around 2.5 million. New Zealand has only just begun the rollout of its first vaccines.
Economic recovery - After the containment of the COVID-19 virus, an economic recovery is expected. Following 2020’s contraction of the global economy, there is hope for a swifter than usual recovery. This is largely because, unlike previous recessions, activity has been put on hold rather than eliminated and businesses have stayed solvent with the aid of stimulus. Also unlike in the Global Financial Crisis, the banking system remains sound.
New Zealand would likely benefit less than the rest of the world from a recovery, as to date it has avoided the prolonged disruptions seen globally and has maintained fairly stable employment and demand for its exports. The main exception to this would be the overseas tourism sector, which has been crippled by the pandemic.
The other question around a recovery would be whether New Zealand goes into another full lockdown. Let’s hope not, but it shouldn’t be ruled out based on the extremely infectious new strain and widespread infection rates seen around the globe.
While an economic recovery would likely be good news for the share market, the two do not necessarily act together. We saw this strongly evidenced in 2020 when the economy ground to a halt while the share market grew. In the future, it’s possible that the economy could recover strongly while the share market looks ahead to other uncertainties as yet unknown.
- What will the next normal look like?
Out of a mixed year, the good is often overlooked. The year 2020 gave rise to a number of positive outcomes, which may have a lasting impact on our lives going forward. For example:
COVID-19 vaccines were developed, tested and rolled out in less than a year, which could have long-term implications for medicine in the future.
While working from home has its challenges, it also has benefits for many people and could drive long-lasting changes to how we work going forward (flexible hours, commutes, office locations, business travel). Even if employees don’t want to work from home full-time many people have discovered an appreciation of working from home for a day or two a week. With the technology now in place, this is much easier to accommodate.
Carbon emissions were down. While this was largely due to lockdowns it also sped up the transition away from heavily emitting industries and the adoption of clean technologies.
Recent studies have shown that the pandemic has significantly accelerated digital adoption by companies. This will have long lasting effects as even after the virus is contained people will still appreciate the increased ability to use technology in their everyday lives.
- What will happen with interest rates?
Over the final few months of the year, the market went from expecting a negative OCR in 2021 to finding that increasingly unlikely. There are a number of reasons behind this, including a better-than-expected recovery in the New Zealand economy; a stronger housing market; positive global sentiment on vaccine prospects; and increased political pressure to curb rapidly rising house prices.
That being said, the likelihood of lower interest rates for longer is still true, particularly if stimulus continues to flow into markets and inflation remains benign. For people invested in term deposits and fixed interest assets, this means that their level of income is expected to get lower. On the other side, interest rates for home loans are also expected to further decline over the year. The first sub 2% mortgage was offered in October.
- Are asset prices too high?
This is an important question, particularly for new investors. A side effect of low interest rates and stimulus has been a surge in the price of other asset classes including shares, alternatives (gold, silver) and house prices. Since the announcement of potential vaccines, share markets have risen significantly, as have expectations of where the market could go in the future.
Investing at market highs is always daunting, but markets are often trading at new highs. History shows share markets rise over time and so it stands to reason they push toward new highs from time to time. Sitting on the side-lines to wait for things to calm down and drop to a price that isn’t “too high” is more often than not a flawed long-term strategy.
- Are there concerns about renewed trade tensions and political uncertainty?
Over the past 12 months, we have seen an escalation in tensions between China and the West. Recently this came in the form of new tariffs on Australian exports into China. New US President Joe Biden has stated that he will not, at least initially, be reversing the tariffs on Chinese goods that President Trump put in place. New Zealand will likely be forced to walk a tightrope between keeping our biggest trading partner China happy, whilst supporting alliances with Australia and the US.
What is also unclear is the impact of a new US President. President Biden’s influence and power is yet to be determined, however there are significant policy decisions to be made around taxes, global trade, China relations and the power of the big tech companies.
Political risks are ever present and have provided volatile periods in the past and likely will in the future. This uncertainty is one of the key components of the share market and is the reason why they can achieve higher returns over time compared to less volatile asset classes.
The answers to these questions will have major implications for the year ahead and dictate how economies and markets will perform. It can be tempting to make predictions about the year and invest accordingly. As 2020 has shown though, even if you could predict the year’s events you couldn’t necessarily predict how markets would react. At Trustees Executors we counsel a diversified, patient approach to investing consistent with our circumstances and objectives.
If you would like to talk about your investments contact a Trustees Executors Private Wealth Adviser today.
0800 002 431
[email protected]
www.trustees.co.nz
