InvestNow News – 19th June – Nikko AM – May 2020 Investment Update

We noted last month that across all financial markets there had been a surge in returns as markets priced in the upsides from the world moving out of the COVID-19 lockdowns (both physical and economic). This momentum continued throughout May, and albeit at lesser levels than April, investors still enjoyed strong returns for the month. The New Zealand equity market rose more than 3% during the month and there was a similar story in equity markets around the world, although most markets are still more than 10% lower than they were at the start of the year. On that basis, the NZ market seems quite robust being just 5% lower than it was at the start of 2020. We’ve noted before that holdings of foreign currency can help with diversification, and it’s noteworthy that the MSCI global equity index in NZ dollars (unhedged) is broadly flat for the year to date meaning that the losses in equity markets have largely been offset by the gains from holding the foreign currencies.

It is perhaps not surprising that Government bond yields have risen slightly over the month as the market digests the size and scale of the borrowing programmes announced around the world. However, this movement has been relatively modest as central banks have been acquiring as much debt as necessary (and sometimes arguably more than strictly necessary) in order to keep yields suppressed. Within this environment credit spreads continue to narrow and therefore we’ve experienced not only another positive month of returns for investors in aggregate style bond mandates, but significant returns relative to the yields on the portfolios. This was especially the case within our NZ fixed interest funds which returned around 1.3% for the month which is broadly similar to the annual yields in the portfolios.

With positive returns from the alternative sectors of the Option Fund and the Multi-Strategy hedge funds (each returning around 2.5%), the monthly returns for all diversified funds were very healthy. It’s possible that financial markets have moved ahead of some of the underlying economic data and so we’re mindful of the possibility for this to pull back at some point; but in the meantime as central banks provide unprecedented levels of money supply and the momentum from the easing of global lockdowns continue markets may remain buoyant for the immediate future.