Article written by Nikko AM – June 2020

Welcome to Nikko AM’s Investment Update for June

The remarkable upsurge in financial markets continued throughout June leading to very strong monthly returns for investors in each of the Nikko AM diversified funds. Equity markets globally seem to be shrugging off the COVID-19 shutdowns and the NZ market is no different. Rising by over 5% in June and taking its 12 month return to nearly 10%, the rise would have been noteworthy under regular conditions, but on the back of the most severe economic contraction in several decades it’s quite astonishing. To understand what’s going on we need to look at the actions and activities of Governments and central banks. The level of spending that governments across the world have undertaken has been at unprecedented levels; this has inevitably had the desired positive effect of helping to minimise the job losses from business failure and to enable struggling businesses to weather the storm until a more normalised operating environment can return.

It may have been expected that with such large spending taking place and more planned spending to come, governments would have been forced to pay higher rates of interest for such borrowing. Indeed that is exactly what market forces would have required, and the resulting falls in bond prices and accompanying losses on the equity markets would have been severe. However, central banks were quick to respond to that dynamic and agreed to purchase vast quantities of these government bonds in order to drive prices up, keep yields low and inject more money into the financial system than at any point in history. In addition to the promise of buying as much of the newly printed debt as required, central banks have also embarked on buying existing government debt, corporate debt, and in the case of Japan equity stocks too – all with the goal of maintaining financial stability (and simultaneously supporting asset prices).

With that in mind, it therefore becomes much easier to explain the recent market dynamics. The unknown question is whether all this stimulus will enable the economic engine to get fired up again and enable an orderly and managed removal of the stimulus, or whether eventually the system will become so unstable that even the central banks can’t prop it up, or there’s a policy misstep creating a very painful, short, sharp adjustment before a more permanent rebuilding can commence. In this environment, we believe it becomes increasingly important to be actively managing portfolios and only owning securities and companies that you know and understand fundamentally well.