Selected Market Indicators for Periods Ended 31 March 2020
March proved to be one of the worst months for asset prices in modern history. Escalation of a widespread sell-off that began in February spilled over into a sharp liquidity squeeze, causing not only historic drops in equities but also safe-haven assets such as government bonds, gold, and defensive currencies, as correlations trended to one. Central Banks and governments were quick to act on the adverse conditions and material downgrades of economic forecasts, implementing a number of monetary and fiscal schemes to stimulate a world in lockdown.
The MSCI World Index finished down -12.8% (-9.2% in unhedged NZ dollars), while Emerging Markets lost -13.0% (-11.5% in unhedged NZ dollars). New Zealand Equities (-12.8%) were down, as were Australian Equities (-20.7%), while Global Listed Property (-23.3%) and Infrastructure (-14.5%) also struggled as economic activity came grinding to a halt. Despite their generally defensive characteristics, bonds were no exception to the slide in asset prices, with NZ (-0.3%) and Global Bonds (-1.7%) both down as credit spreads widened and liquidity dried up.
An estimate of the Balanced Fund gross index return based on selected market indicators for March is -7.1%.
Significant developments include:
- The novel coronavirus continued to spread, with confirmed infections almost surpassing one million at month-end. The majority of developed economies are now in some degree of lockdown, with only “essential” services operating in many. Economic forcasts vary, however the general consensus is for a deep global recession, and unemployment figures that are unprecedented in recent times. The shape of the recovery remains uncertain.
- The US Federal Reserve cut the Federal Funds rate to 0.00% - 0.25% and implemented a “whatever it takes” quantitative easing (QE) programme, providing a partial floor to markets towards the end of the month. The Bank of England and European Central Bank introduced similar schemes. The Reserve Bank of New Zealand cut the Official Cash Rate to 0.25% on 16 March in an emergency meeting and later announced a QE programme.
- Oil price war escalation between Saudi Arabia and Russia provided yet another headwind to an already fragile global economy, particularly for OPEC+ emerging market nations. The price of oil dropped over 50%, ending March at just above $20 USD/barrel.
Despite fiscal spending (including wage subsidisation) providing support for a rally in the final week of the month, domestic equities still lost considerable value over the period (-12.8%). Across the Tasman, Australian equities were even worse off (-20.7%), struggling as key commodity price-senstive sectors were adversely affected as demand dried up throughout March.
Developed equities experienced immense intra-day volatility throughout March, shedding -12.8% over the month as the coronavirus epidemic escalated in Europe and the United States. Emerging Markets were down -11.5% (in unhedged NZ dollars) as concerns grew over the potential for an emerging market credit crisis due to tapering demand and consequent price drops in commodities.
Property and Infrastructure
Global Listed Property (-23.3%) and Global Listed Infrastructure (-14.5%) underperformed equities over the month. Flow-on effects from widespread country lockdowns, including reduced foot traffic in malls, cars on toll roads and industrial electricity demand has a material impact on both sectors.
NZ Bonds and Cash
NZ composite bonds (-0.3%) were down over March, with Government Bonds benefiting from the QE programme announcement and outperforming Corporate Bonds. The NZ 10-year bond yield ended March at 1.06%, reaching a low of 0.86% and a high of 1.63% along the way.
Global Aggregate Bonds (-1.7%) suffered as markets experienced worse liquidity conditions than at the peak of the GFC. Credit spreads widened signifcantly as Corporate Bonds (-7.1%) underperformed Governments Bonds (0.0%). The US 10-year ended the month at 0.70%, at one point reaching a historic low of 0.54%, displaying remarkable intra-day volatility.
The New Zealand dollar weakened against the majority of its global counterparts throughout March as investors continued to favour defensive currencies. The largest moves were felt against the US dollar (-4.4%), Japanese yen (-4.3%) and euro (-4.3%). The New Zealand dollar strengthened against the Australian dollar over the month, gaining +0.7% and almost touching dollar parity.
20 April 2020