Dear Fellow Investor,

Covid Lockdown 2.0 Update

After just over 100-days without any community transmission of Covid-19 in New Zealand, last Tuesday four new cases were detected. That evening the Government quickly announced that an initial 3-day lockdown period would be implemented at noon on Wednesday. This was followed last Friday by a decision to extend the current restrictions by another 12 days, ending Wednesday 26 August. This takes the total duration of restrictions to two weeks, with a review to be conducted on Friday 21 August. Auckland remains in Level 3 lockdown while the rest of NZ is in Level 2. Given the fluid nature of the situation, any information quickly dates, but at the time of writing we have 49 active cases of community transmission in addition to a number of cases picked up at the border. Fortunately, 46 of the community transmission cases to date relate to a single cluster but three are still unexplained and under investigation. While health authorities currently believe that we are only dealing with one cluster, this is a critical issue that we will be following closely. The emergence of further clusters would be a game changer as it would indicate wider community transmission and almost certainly result in a longer lockdown period.

The Government has also announced an extension of the Wage Subsidy, with further details to be released shortly. To date the Government has paid out over $13 billion under the Wage Subsidy Scheme. While difficult to quantify, the economic impact of the new August lockdown is likely to be in excess of $1 billion for the 2-week period. The longer-term impact on business confidence of moving in and out of lockdown is still harder to assess – anecdotally many smaller businesses have really been knocked by the second lockdown, with concerns that it is very difficult to plan for the medium term when there is a strong possibility that further lockdown periods will be required.

The immediate impact on NZ’s stock market was somewhat muted with a fall of 1.7% over the week compared to small rises in the Australian and US markets. Some of the more directly affected shares (like tourism and retail businesses) sold off sharply with falls between 5 – 9%. Markets around the world have been somewhat resilient to Covid developments, supported by ultra-low interest rates and massive fiscal stimulus. The NZ Dollar was weaker against the AUD but that is a trend that has been underway for some time.

There is an enormous amount of political sensitivity around the handling of the resurgence in Covid. Although there remains a high level of uncertainty surrounding the cause of the Auckland outbreak, debate is raging over the appropriate course of response from this point. The upcoming general election serves as a useful case in point; Prime Minister Jacinda Ardern has this morning announced that the general election will be delayed by four weeks until 17 October. This announcement followed some days of public discussion and divergent views amongst politicians and others on the most appropriate course of action.

Elsewhere, there have been a number of positive developments on the healthcare side of Covid over the last month with promising progress on credible (ignoring Russian announcements!) vaccines with the front runners being the Pfizer, Oxford and Moderna vaccines. Phase 3 trials are underway, and we can expect more news flow in September. Likewise, great strides have been made in the treatment of Covid with death rates in countries like Germany and the UK, where they are effectively operating under a level 2 lockdown framework, falling to very low levels. In the UK now (since mid-June) there are far more fatalities from the summer flu than from Covid.

Covid is a fluid situation with many variables. Governments have the unenviable task of trying to navigate the best course, balancing health risks with economic consequences. We, at Devon, are carefully monitoring developments here in New Zealand, and globally, and will continue to build investment solutions based on our views around the myriad of variables associated with this situation. We continue to operate effectively despite the Level 3 restrictions in Auckland and will keep you up to date with our views as they develop.

Best regards,

Slade Robertson
Managing Director