InvestNow News – 1st May – Nikko AM – March 2020 Investment Update

There’s really only been one topic of discussion during March, and everything that’s been going on (whether in financial markets or just more generally) has been discussed within the context of COVID-19. There has been no shortage of media coverage of the enormous economic damage being suffered both directly as a result of COVID-19, and indirectly as result of differing government responses to the pandemic across the world.

The size of equity market losses are significant, with the NZ equity market down almost 13% which is lower than the 10% falls seen in June 2008 and October 2008, and we need to look back to August 1998 to find a 1 month loss of this magnitude.  This story has been echoed throughout the world, and in fact the NZ market was far from being the worst impacted with, for example, losses in some markets in Europe and the UK being down around 20%. The falling NZ dollar provided some protection for assets held in foreign currency, especially the US dollar and Japanese Yen, but in aggregate the MSCI ACWI index unhedged was still down 10% for the month. Compounding the losses in equity markets was the lack of upside in bonds; despite central banks pushing cash rates close to zero (if they weren’t there already), credit spreads widened and bond markets strained, resulting in modest losses from bonds and even cash funds during the month.  As a result the Balanced Fund has produced its lowest ever single month return at -9.5%.

Within the ‘alternative’ sectors of our funds, the Option Fund suffered from a continued collapse in the US treasury 10 year rate, albeit that this stabilized later in the month resulting in some high premium income which sets the fund up for some stronger performance as movements in rates start to subside.  Returning a loss of 20% for the month it behaved more akin to the worst hit equity markets than giving uncorrelated outcomes.  Conversely the multi-strategy hedge fund did provide some protection albeit that it fell in value by around 4.7% for the month.

Intra-month lows were much worse than even the full month data shows as by the end of March markets took some comfort from central bank and government responses globally.  However, it remains to be seen whether markets continue with some optimism that we’re through the worst of the negative news, or whether as more data comes to light there will need to be another revaluation of asset prices – and whilst that remains an open question, and we should expect volatility to remain elevated.  This provides opportunities for our portfolio managers to acquire some assets which have good long-term prospects at reduced prices and so position the portfolios positively going forward as we look beyond the immediate uncertainties.