Monthly Market Update
As at end March 2020
Intervention goes full throttle
The plunge in global equity markets seen in March was the worst monthly performance since the GFC in 2008. The rapid spread of COVID-19 around the world stunned most, and found authorities initially unprepared and struggling to adequately respond. Although sharemarkets recovered from their lows by month end, major markets are still off between 10% and 20% in local currency terms. The benchmark MSCI World Index (NZD) was down 9.2%. This result was assisted greatly by a collapse in the Kiwi dollar against major index currencies, amounting to approximately 5% against each of the US dollar, Euro, and Yen.
Government responses varied from partial to complete isolation of citizens, and lockdown of their economies. For example, New Zealand saw nationwide isolation and lockdown, with only essential services remaining in operation. This contrasts to less restrictive measures in the US, where only about a third of its economy has been shut down, and Sweden, which remains completely open for business. Central Banks responded with all of the tools at their disposal, with the last two weeks of the month seeing over 40 interest rate cuts around the globe. Several of these authorities, including the RBNZ, are also engaging in Quantitative Easing (QE) for the first time. The US Fed has been at the centre of actions trying to stabilise financial markets, with liquidity being the key priority. During the month, it expanded its QE program to include municipal and corporate bonds for the first time. It also moved from buying a fixed number of treasury bonds to announcing an “unlimited” purchase program, and broadened access to US dollar funding lines to more foreign Central Banks. What finally turned markets was the government’s record $2tr fiscal cash injection into the US economy. The package especially targeted SMEs, healthcare, and unemployment benefits; and included a one-off cash transfer to citizens. Airlines were also given a lifeline with $50b in loans. With most Central Banks and governments now in full throttle mode, there is a growing sense they have, for the most part regained control. Although a dramatic fall into deep recession is upon us, the hope is that fiscal and public health interventions will limit its extent and duration.
NEW ZEALAND MARKET
We’re all in this together... separately
March saw the COVID-19 outbreak change quickly from a potentially serious threat to a full-blown global pandemic, with collateral damage reflected in historic negative returns for equity markets as countries tried to slow the spread through social isolation. New Zealand did not escape the rout, with the S&P/NZX 50 ending 13.0% down. This represented the largest monthly fall since the index’s creation almost 20 years ago. The response from the government and Reserve Bank has also been historic. We have seen the OCR cut to 0.25%, a large-scale asset purchase plan announced, a NZ$12.1b fiscal rescue package, and the entire country put into lockdown all inside a fortnight.
The pain continued in March for the tourism sector with Auckland Airport, Tourism Holdings, and Air New Zealand (AIR) returning -36.6%, -56.2% and -62.6% respectively. AIR has seen revenue from international flights drop 85%, and cut 95% of its international capacity in response. To assist the national carrier through this disruption, the government has agreed to lend the company NZ$900m. The company’s CEO, Greg Foran, offered to take a 15% pay cut, a growing trend amongst listed company executives.
The lockdown had an immediate and significant impact on retail and entertainment companies. Share prices declined drastically for Kathmandu (KMD) and Vista (VGL), both of which saw their share prices drop 63.3%, and SKYCITY (SKC), which fell 41.6%. Unsurprisingly, Fisher & Paykel Healthcare (FPH), maker of respiratory care products, was the top performer with a 17.8% return. In a period where many companies withdrew guidance due to uncertainty, FPH upgraded its FY20 revenue guidance on higher demand and a weaker NZ Dollar.
Ides of March Decimation
Volatility escalated as virus impacts and uncertainties reverberated around the world, seeing the benchmark S&P/ASX 200 Index return -20.7%, breaking its previous down-month record set during the GFC. The Energy and Property sectors experienced the sharpest declines of 37.5% and 35.1% respectively. Consumer Staples and Healthcare were the most resilient, returning -3.6% and -5.4%.
Over half of the Index constituents had negative returns exceeding 20%. Media companies Sothern Cross and Ooh!media were the worst on the bourse, returning -75.9% and -72.0% respectively, followed by -69.6% for travel agency Flight Centre. Strongest performers were almost unequivocally those companies expected to derive a revenue benefit from the situation, notably grocery distributor Metcash (+27.5%) and New Zealand’s dual-listed respiratory device maker Fisher & Paykel Healthcare (+17.3%). In response to the unprecedented income shock, fiscal and monetary stimulus were delivered at a frenetic pace. The RBA cut the cash rate twice, taking it to a record low of 0.25%, and began QE to target medium term interest rates via government bond purchases. Further, the Commonwealth announced three waves of fiscal stimulus totalling over A$200b (roughly 11% of GDP) to plug the hole in Australia’s service-heavy economy. The bulk of the package is a wage subsidy tied to keeping jobs, which is expected to cover six million workers. With the extent of the fallout yet to be reflected in lagging unemployment statistics, it remains to be seen whether more intervention is required.
Flight to safety
Fixed interest markets were not immune to the volatility seen across equity markets and in many ways have been more interesting to observe. The magnitude and speed of government and Central Bank responses to the coronavirus pandemic has been unprecedented and relatively consistent across the globe. Taking New Zealand as an example, the RBNZ gave a speech on March 10th where the governor stated that “the Reserve Bank has not, and still does not, need to use alternative monetary policy instruments to the OCR.” Less than a week later, the OCR was cut to 0.25% (the effective lower bound) and a week after that a large scale asset program was announced with a total size of up to $30b (roughly 10% of GDP). Within this time period the New Zealand government outlined a $12b economic response package and a raft of other measures aimed at supporting the economy.
Trying to assess the impact of these measures on bond prices has been challenging, which has contributed to higher than normal volatility in bond yields, particularly for longer dated bonds. We did see negative returns for most international markets with increased uncertainty leading to lower prices. New Zealand markets had a better experience with relatively small declines in the S&P NZX Government Bond Index and the S&P NZX Investment Grade Corporate Bond Index, falling by 0.1% and 0.8% respectively. This is a reflection not only of the higher credit quality of our markets, but also the firm response by our government, both in shutting down our borders and initiating full lock down. There will be negative economic impacts arising from this and the magnitude is almost impossible to forecast at this stage, as it is around the globe. For this reason, we expect volatility in bond prices to continue.