April 2020

We are living in extraordinary times, and it is therefore no surprise that financial markets remain volatile as investors try to digest, assimilate and process what is going on and what it means for the economy, spending, employment, activity etc. With a distinctly uncoordinated global approach politically, there is plenty of uncertainty around what different governments may or may not do, and therefore what that means for businesses, workers and consumers. Perhaps the most surprising aspect of the month of April was not that the price of oil futures could go negative (astonishing as that was), but just how strongly many of the markets responded to the injection of liquidity that came from all central banks, and the US Federal Reserve in particular.

Equity markets have always been volatile, and this will remain a feature of the sector, but we expect this to remain elevated in the current environment and note that the strong returns in April appear to be possibly somewhat disconnected from the weak economic data which we expect to emerge. It would therefore not surprise us if we see another pull back in equities in the short term. However, we also expect that equities will continue to be the engine room of performance within the diversified funds over the longer term. Bond markets provided investors with strong returns in April as much of the mark-to-market losses of March unwound. In fact the March sell-off turned out to largely provide a unique opportunity to increase the yield in portfolios for enhanced returns which we duly took advantage of; much of this benefit was experienced in April, but it will continue to benefit portfolios in the coming months as well. Nevertheless, yields in bond funds are now at new lows meaning that not only will returns from this sector be lower going forward, but it sets lower expectations for returns across all sectors.

We’ve seen some large moves in currencies from month-month, but these haven’t been especially volatile, though it is quite possible that increased currency volatility could arise. The NZ dollar remains weaker than it was a few months ago (meaning that foreign currency assets have provided good protection and value for those assets), but this reversed a little during April partially narrowing the gap between hedged and unhedged assets. Overall, April provided investors with a substantial bounce back in return from March, but this was far from complete and given the permanent damage to economies from the various shutdowns and border closures any recovery will only be partial. We expect that there are still difficult times ahead as the world slowly picks up the pieces of the damage from extreme government borrowing, high unemployment and disrupted supply lines as well as dealing with ongoing outbreaks of COVID-19.

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