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The unwanted sequel

Investing newsroom
Frank Jasper, Chief Investment Officer

Frank Jasper
Chief Investment Officer | Email Frank »

17 August, 2020

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While a second Auckland lockdown is unlikely to have a major effect on financial markets it is a reminder that COVID-19 may be with us for some time. Rolling lockdowns over an extended period cannot be ruled out. This means being more selective than ever in the New Zealand companies we favour. Owning a portfolio that includes high quality international shares provides useful diversification. Last, and maybe most importantly, more lockdowns will put downward pressure on interest rates. That will create challenges for people living on interest income.  

 

 

Well that didn’t go to plan. Like many of us, and not underestimating the early impact on many people from the COVID-19 pandemic, I had welcomed a return to normality, or something close to it, following the initial lockdown. Seeing family, friends and visiting more of our amazing country was a respite from the overseas news that has been hard to watch. I don’t think any of us was naïve to the possibility of further outbreaks but it was remarkable to see how quickly the mood of the country had lifted.

Last week changed that. We now know two things. First that sporadic outbreaks of COVID-19 are likely to be a feature of our lives until it either peters out, or a vaccine is developed. Secondly, and this might be a little too early to call, it feels like the process for managing these outbreaks, even though not perfect, is pretty robust. For that we should all be thankful.

While a second lockdown in Auckland and the heightened alert level in the rest of the country is not a great development, the impact on your investments will be, in my view, much less dramatic than when coronavirus first emerged. In fact after an initial small fall New Zealand shares, for instance, are largely unchanged since we got news of this new cluster.

That said I think it is important to consider the impact of further outbreaks in New Zealand and what that might mean for your investments.

  1. Rolling lockdowns affect some companies more than others – if we do end up with multiple lockdowns over the course of the pandemic this will affect the profitability, and hence share prices, of some firms more than others. Unfortunately it is the companies that we already know that are most exposed that will continue to be impacted. In particular it is retail, the owners of retail property and travel and tourism who bear the brunt of ongoing lockdowns - or even just of reduced consumer and traveller confidence.

    In many cases these companies are better positioned since the pandemic started, some have raised additional capital, or they have reduced costs and become more flexible in how they manage their businesses, but it still has an impact.

    There are other companies that lockdowns in New Zealand have very little impact on. In particular companies, like A2 Milk and Fisher & Paykel Healthcare, which generate a bulk of their earnings offshore.
    Being selective in the companies we invest in, actively managing your money, is even more important than ever in navigating through the pandemic.

  2. NZD acts as a safety value – your portfolio has an inbuilt safety valve. If there are further significant lock downs impacting economic activity in New Zealand it is likely that the NZ dollar would weaken and potentially weaken dramatically.

    Many of our clients are invested in strategies that have exposure to offshore shares and, as part of that, exposure to offshore currencies. In the event of fall in the kiwi dollar, all other things being equal, these assets would appreciate in value in kiwi dollar terms helping protect the value of your investments. This diversification is very important. 

  3. More government spending and lower interest rates – possibly the longest lived impact a new round of lockdowns would have is on fiscal and monetary policy. Already we have seen very clear signalling from the Reserve Bank of New Zealand that the official cash rate is likely to head below zero. That means falling interest rates on deposits and term deposits for all of us. Our portfolios are positioned to benefit should rates head lower.

    On the fiscal policy side the COVID-19 wage subsidy scheme has been extended and we would expect more government spending should things get worse. While the New Zealand Government’s balance sheet is in good shape to accommodate this it may impose a drag on future economic growth.

It is disappointing to be back in lockdown, especially for Aucklanders, however the impact on your investments is likely to be minor and short lived. 

And while further lockdowns would be a challenge for the New Zealand economy, through careful active management of your portfolio and broad diversification, your investments should emerge in good shape. If we get that right you can focus on the real challenge; keeping the kids occupied while at home!!



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