Commentary from Matt Johnson, Nikko AM – 2021

As we enter a new year it is timely to look back on 2020 a year that in many ways was full of surprises.  There was the speed at which Covid-19 escalated from a regional outbreak to a global pandemic, the severity of government initiatives to manage the pandemic, the size of stimulatory measures taken by both governments and central banks and the magnitude of equity market rebounds.  In some ways the most surprising of these events is the extent to which equity markets recovered amidst the economic headwinds of the pandemic.  At year end the MSCI ACWI in USD was up 12.7% on its 2019 close and up 68% from its intra year low on 23 March around the peak of the first wave of the Pandemic outbreak.  A similar picture is apparent in New Zealand with the NZSE50 up 15.4% for the year and 69% from its intra year low.

At first glance this outcome for equity markets is counter intuitive.  One would think that with the curtailment in economic activity valuations of equities should be diminished however there are countervailing forces at play. Globally we have seen governments undertake massive stimulatory measures and central banks cut interest rates and use alternative monetary policy tools to encourage business and consumer spending.  The primary goal of these stimulatory measures is to support society and economic activity which has arguably been achieved nevertheless these initiatives also have secondary impacts of which most notable for markets is the upwards pressure they place on asset prices.

As we move into 2021 markets face both promise and peril.  On the positive side, distribution of various vaccines are underway globally presenting the prospect that towards the end of the year the ongoing negative impacts of the pandemic could be much abated.  At the same time interest rates are likely to remain low and government stimulus continue, under this scenario equity and asset prices would be supported by low interest rates along with government and central bank stimulatory measures.  On the negative side Covid continues to prove a threat and is far from controlled in many parts of the world.  On top of this there is also the risk the virus mutates sufficiently that vaccines prove less effective.

A year ago, prior to the arrival of Covid, few would have predicted a global recession in 2020.  Similarly, few would have thought we could move to an environment where a number of businesses could function with the majority of their staff working remotely.  The learning of which is predictions and assumptions made with the best of thought can often prove to be far from reality. This aside we are pleased to note the strong performance of the diversified funds over 2020 – the benefits of diversification, a disciplined approach to maintaining a strategic assets allocation and staying the course were well proven over the year. As we now look to 2021 risks and uncertainties are apparent however a continuation of this approach will continue to serve investors well.