Virus vs Vaccine and spending – Quarterly Economic and Financial Markets Commentary January 2021 – Kiwi Investor Blog

Key Developments over the Quarter

  • Regulatory approval of Covid-19 vaccine and commencement of global immunisation program
  • Democrat Party’s eventual control of Presidency, Senate, and House of Representatives will provide further support to the US economy from an increase in government spending
  • US Federal Reserve’s decision to adopt a more flexible “average inflation targeting” policy

In recent months there has been a tug of war between rising Covid-19 infections and the development, approval, and initial distribution of a Covid-19 vaccine.

Increasingly the roll out of the vaccine will win this battle, helped by increased spending in the US and ultra-low interest rates around the world.  This is supportive of global economic activity and sharemarkets in 2021.

Key Risks

  • The Covid-19 vaccines are less effective than anticipated, particularly given existence of different strains
  • The US Federal Reserve change their policy settings earlier than expected
  • US consumers are cautious preferring to save rather than spend more of their $2,000 government handout
  • There is the risk that global economic activity surprises on the upside in 2021

Portfolio Considerations

  • Prefer equities over fixed income on a 12 – 18 months time horizon
  • Shorten duration exposures of portfolios
  • Emerging markets, cyclicals, and value to outperform
  • Any sharemarket pull-back should be seen as an opportunity to add too equities
  • Start preparing portfolios for a period of higher inflation

Effective and efficient implementation of investment strategies key.

Vaccine Roll Out

A successful vaccine has been developed in record time, less than one year.  The previous record for the fastest time to develop a vaccine occurred in the late 1960s when it took four years to develop a vaccine for the mumps.

More than 68 million vaccine doses had been administrated in 56 countries by late January 2021.  The daily rate is approximately 3.4 million doses a day.  Israel is leading with 43% of their population vaccinated.  America has given out 23.5 million doses, 7.1% of their population. 

A World Health Organisation linked plan is in place to administer 2 billion vaccine doses globally in the first half of 2021. Expectations are for large portions of the population to be vaccinated by the middle of 2021. 

Goldman Sachs forecast: The UK is expected to vaccinate 50% of its population by the end of March, with the US and Canada following in April. The EU, Japan, and Australia reach the 50% threshold in May.

These targets are likely given the expected ramping up of vaccine production over the months ahead and despite a slower start to the vaccine roll out than expected in some countries.

Albeit virus cases and deaths have reached new records and new variants of the virus have emerged in the UK, Ireland, and South Africa.  This wave of infections across the world, particularly in Europe and the UK, has resulted in renewed lockdowns and ongoing restrictions on activities.

As a result, global economic activity is expected to be weaker over the last quarter of 2020, after a strong rebound in the third quarter of last year. This weakness is expected to flow over into the New Year, 2021, given the above and that it has been a harsh northern winter. This is reflected in recent economic data. For example, the US economy expanded at a 4% annualised rate in the fourth quarter of 2020, which was below expectations and down from the record 33.4% annualised rate in the previous three months.

However, once the vaccine rollout gathers speed the reopening of economies will accelerate around the world.

Democrats win Georgia Senate elections

The outlook for 2021 is positive and received a boost following the Democrats taking control of the US Senate by the slimmest of margins after winning both seats in the Georgia run-off elections held in early January.

President Biden has released his $1.9 trillion (over 8% of the economy) Covid-19 Relief package, this is in addition to the $900 billion of spending approved by Congress in December.  The plan includes $1,400 in additional direct payments to individuals (raising cheques to $2000) and aid to small businesses. 

The relief package aims to provide economic support until the threat of the pandemic has receded.

There are political risks around getting the complete packaged passed in to law.  Albeit, a sizeable percentage of the package is likely to be passed into law, which will represent a sizable stimulus for the US economy.

The extra spending along with ultra-low interest rates argues well for the global and US economy. 

Interest rates are likely to remain low for some time.

US Federal Reserve Policy Position

The US Federal Reserve (Fed) will now seek to achieve average inflation of 2% over time.  Instead of targeting a 2% inflation rate, the Fed will allow higher inflation “for some time” to offset below 2% periods of inflation. 

They will also target “broad and inclusive employment”, where employment is placed ahead of inflation in terms of policy priority.

This is a dramatic change in policy and has implications for financial markets now and in the future.

The key short-term impact, interest rates in the US are expected to remain lower for longer.  Specifically, the Fed will likely keep the Feds Fund Rate at the currently level of 0.25% until after there has been a period of inflation above 2%.  And this is not likely to happen until late 2024 – early 2025.

Longer-term, the risks to containing inflation have increased.  Likewise, longer-term interest rates will likely drift upward in anticipation of higher inflation and as the Fed scales back on other areas of their Policy response, such as the buying of fixed income securities (tapering of Quantitative Easing Policy).

With regards to US inflation, core consumer prices have risen 1.6% over the last year in the USA.

Although inflation is expected to be well contained over the next few years, the risks of higher inflation in the future are mounting, particularly given the size of the government spending being undertaken in the US.

Although there might be some volatility in the inflation rate over 2021, reflecting the extreme disruption to the economy last year, core inflation is set to remain low given the level of spare capacity within the economy.  By way of example, as presented in the graph below, US unemployment remains high despite a breathtaking recovery over the second half of 2020. The US unemployment rate is currently 6.7%. This compares to 14.8% at the end of April 2020 and 3.5% at the beginning of the year.

Nevertheless, the global economic environment is transforming to a more reflationary phase. This compares to the deflationary environment that has dominated the global economy since 2008 and the Global Financial Crisis (GFC).

As outlined in this Kiwi Investor Blog Post, investors are well advised to consider preparing their portfolios for the potential of a higher inflation environment.

Economic Outlook

The global economy is poised to rebound strongly in 2021, primarily driven by the factors outlined above, vaccine roll out, ultra-low interest rates, and government spending measures.

For the first time in over 10 years, we are likely to see strong and synchronised global economic growth over the years ahead.

The consensus forecast for world economic growth in 2021 is just over 5%, and approximately 4.0% in 2022.  The global economy shrank 4.2% in 2020.

The V shape economic recovery is well on track around the world.

Given the Democrats win in Georgia as outlined above, economic growth forecasts for the US have been revised upwards recently on an expected increase in government spending. Consensus forecasts are for just over 4.0% growth in 2021, after a decline of 3.5% in 2020.

Many areas of the US economy are expected to perform well in 2021, including consumer spending, a rebound in capital expenditures, a strong housing market, and inventory rebuilding. Given above potential economic growth this year the level of unemployment should decline, reducing the slack in the US labour market.

The US economy has remained resilient in the face of the pandemic, with businesses learning to adapt to restrictions on activities.  There is little evidence of economic scaring that would have negative longer-term impacts on economic activity. 

This argues well for the US and risks to economic activity in 2021 could well be to the upside.

The Chinese economy rose 6.5% in the last quarter of 2020 from a year earlier.  A strong outcome to finish the year and resulted in the Chinese economy growing 2.5% last year, the only major economy to report positive economic growth for 2020.  Albeit this is the country’s weakest annual economic expansion since the late 1970s.

China is more advanced in its economic cycle post Covid relative to the rest of the world.  The rebound in the economy is being driven by industrial production, exports, retail sales, and investment into fixed assets.  Like the rest of the world, economic activity remains weak in tourist related industries, such as hotels and catering.

Around the rest of the world the Eurozone is expected to grow around 4.6% in 2021 after the sharp -7% contraction in 2020.  The UK economy, which suffered one of the sharpest declines in 2020, estimated to have contracted by -11.2%, is on track to rebound in 2021 with over 5% GDP growth. The Japanese economy is expected to grow by around 2.5% in 2021.

The New Zealand economy expanded a stronger than expected 14% in the third quarter of 2020.  This follows a historical 11% contraction in the second quarter.  The economy is 2.2% smaller compared to a year ago.  Construction and retail trade led the recovery following the second quarter lockdown.  Accordingly, there has been an improvement in business confidence.

Inflation in the final quarter of 2020 was 0.5%, which was stronger than expected.  Annual inflation was unchanged at 1.4%.  The quarterly result in part reflects strong demand in some areas (e.g. accommodation and air travel) due to pent up demand following lockdown, supply issues in other sectors, and rising prices for housing construction.

Some volatility in inflation data can be expected in the quarters ahead, and Central Banks, such as the Reserve Bank of New Zealand, will look through this volatility.

In relation to New Zealand, a strong rise in house prices over the last three months of 2020 has reduced the likelihood of negative cash rates. 

This turn of events has witnessed a steady appreciation of the New Zealand dollar (Kiwi) over the last quarter.  The Kiwi is currently trading at around 72 cents versus the US dollar, compared to 67 cents at the end of September (+6%), and is 18% higher compared to 60 cents at the end of April 2020.

Brief Market and Portfolio Positioning Comments

  • Global equities climbed over 17% in the December 2020 Quarter, to finish the year 16.9% higher than at the end of 2019.
  • The US sharemarket ended the year at historical highs.  The S&P500 returned 18.4% in 2020 and is over 70.0% higher from its yearly lows in late March.
  • The New Zealand sharemarket also finished the year strongly, rising 16.3% in the last quarter of the year, returning 14.7% in 2020.  This is the Index’s ninth consecutive year of positive returns.  The benchmark has more than quadrupled since the end of 2011, and more than doubled since 2015 (benchmark returns are based on S&P Dow Jones Index data).
  • The Australian sharemarket returned 13.7% over the last three months of 2020, eking out 1.4% for the year. 
  • Information Technology and Consumer Discretionary tended to be the better performing sections, Energy and Real Estate sectors the worst.
  • Growth factor outperformed Value by a wide margin in 2020, as is has for some time.  In the US, growth returned 33.5% and value 1.4% for the 12 months period.
  • Nevertheless, this hides a sharp reversal in market fortunes over the last quarter of 2020, in the US value returned 14.5% and growth 10.7%, enhanced value returned 24.6% for the period.
  • This reversal in market leadership has some legs and likely has further to run, given the economic backdrop outlined above.
  • Likewise, cyclicals and the energy sectors will benefit from stronger global growth and the releasing of pent-up demand as economies open-up following the roll out of the vaccine.
  • After 10-years of underperforming Development Markets, Emerging Markets are better placed to benefit from an increase in global manufacturing.  These markets recently reached historical highs; surpassing levels last seen in 2007.
  • Within portfolios duration should be reduced.
  • The ultra-low interest rate environment presents challenges for investors in the years ahead.  Over reliance on cash, fixed income, and equities to generate portfolio returns could lead to disappointing outcomes.  Investors should look to increasingly diversify outside of the traditional asset class.  This Post by Kiwi Investor Blog provides access to discussions on different portfolio investment strategies than could be considered in meeting the challenges ahead.

Global sharemarkets have performed strongly in recent months and are susceptible to a pull back. 

Given the economic backdrop outlined above, this would provide an opportunity to consider adding to equity positions.

Please read my Disclosure Statement


Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

The Value of Financial Advice

Getting the right financial advice can deliver more than just better investment outcomes. It can result in increased peace of mind heading into retirement, lower stress in a relationship or even higher happiness levels.

The research is clear cut, people who receive Financial advice are generally happier and are likely have a higher level of wealth at the point of retirement.

Even for those who receive limited advice on specific elements of their financial situation can experience material benefits.

Analysis supporting these conclusions can be found in a recent research paper by the Australian Financial Services Council, which was prepared by Rice Warner, Titled “Future of Advice”.

The paper covers several topics, with the aim of advancing the public policy debate on Australian financial services.  Albeit the Australian focus, there are key learnings for all.

This is an important issue; the personal and broader economic impacts are material.  The benefits of sound financial advice should be championed more widely.

In addition to analysing the current landscape for Financial Advice within Australia the report covers:

  • The need for Advice, and size of the Australian market
  • The Value of Advice, both tangible and intangible benefits
  • A proposed model which seeks simplification, affordability, accessibility and quality of Advice.

I may Post some of the other topics, this short Post focusses on the Value of Financial Advice.

The Value of Financial Advice

In summary, Rice Warner conclude: “We show that people who receive advice are generally happier, with an improved peace of mind.

On a macro level, we set out that advice leads to higher wealth which in turn leads to lower dependency on government benefits such as the Age Pension.”

The Australian Age Pension is designed to provide income support to older Australians who need it, while encouraging pensioners to maximise their overall incomes. The Age Pension is paid to people who meet age and residency requirements, subject to a means test.

Rice Warner divide the benefits of Financial Advice into two categories for the individual:

  • Quantifiable financial benefits – Tangible Value
  • Intangible value – the non-quantifiable and non-financial benefits provided through advice relationships.

They also consider the economic value, the benefits which flow to the broader economy, through greater use of Financial Advice.

Tangible Benefits

Firstly Rice Warner note the plethora of pre-existing research on the benefits of Financial Advice, they provide the following examples:

  • Russell Investments estimated in 2018 that a full suite of adviser services could be worth up to 3% per annum to an investor.
  • The FSC estimated in 20117 that the provision of savings advice would lead to an individual being between $29,000 and $91,000 better off at the point of retirement. In this research individuals who received advice at a young age received greater value.
  • Survey-based research conducted in 2014 demonstrated that investors who received advice over: – Four to six years accumulated 60% more assets than those individuals who had no advice. – Periods exceeding 15 years accumulated 290% more assets than other comparable households.

They also undertook their own analysis, considering three levels of advice: No Advice; Advice where additional contributions to super and additional personal wealth savings; Asset Allocation Advice (advice in relation to Super Fund only).

They also considered five different member profiles, based on age and level of starting wealth.

They concluded:

  • For average Australians, advice will likely add value to both an individual’s superannuation and their personal wealth. For most, this value will be greatest in the personal wealth component of their wealth portfolio due to the strong existing default structures within superannuation in Australia.
  • Asset allocation advice provides the greatest cumulative increase in funds at retirement when this advice is taken at younger ages. This is because younger individuals have a greater investment period over which to compound the benefits of higher rates of return.
  • Irrespective of level of wealth, for an individual aged 40, approximately half the value of the full advice scenario is derived from simple advice in respect of savings.
  • Individuals who occupy low socio-economic wealth bands are expected to gain more from advice than those who are wealthy. This reflects the tendency of these individuals to: – Save less of their disposable income (in proportional terms). – Allocate assets to safe but low-yielding asset classes (such as Cash and Term Deposits).

The implications of this analysis is that those who seek Financial Advice will likely have a higher level of wealth at the point of retirement.

Rice Warner’s results “suggest that taking limited advice on specific elements of one’s financial situation can lead to material benefits. For example, taking advice on savings, or the construction of portfolios for an individual’s private wealth.”

Intangible Benefits

Rice Warner sum it up succinctly “Financial Advice can maximise the upside, and limit and minimise the downside, of financial decisions. However, simply focusing on a potential monetary value-add ignores other aspects such as the comfort of being secure. We also need to consider the behavioural aspects of consumer decision making in respect of advice. Their perceived need for advice is what drives the market. Consumers need to have a recognition of the need for advice, a willingness to engage with advisers and a willingness to pay. Their willingness to engage will depend on their perception of the potential for favourable outcomes, but it will also depend on their perception of risk – and the cost.”

Ricer Warner note the intangible benefits of Financial Advice include:

  • People who are advised have greater levels of overall happiness.
  •  People who are advised have greater piece of mind.
  • Taking advice can lead to improved relationships due to the alleviation of money-related issues.
  • People who are advised may have better health.

I have re-created the following Table from their report which outlines the research that supports these benefits.

Greater levels of happinessIOOF white paperIndividuals who are advised have 13% greater levels of overall personal happiness than non-advised individuals.
Greater levels of happinessAdvice and Limited Advice Report by Investment TrendsAcross individuals who use a financial planner as their main source of advice:  87% said their adviser made a positive or significantly positive difference to their life. 89% said their most recent discussion with their financial planner was valuable or very valuable.
Improved peace of mindIOOF white paperSurveys of advised clients suggested that advice lead to: 21% more peace of mind with regards to their financial future. 20% increased feelings of security regarding their day to day finances.
Improved peace of mindMLC Wealth Submission – RIRSurveys of advised clients suggested that advice lead to: 79.4% of clients being instilled with improved peace of mind. 81.5% of clients feeling that Financial Advice has left them more confident about making decisions
Improved RelationshipsIOOF white paperSurveys of advised clients suggested that advice led to: 19% less likely to have arguments with loved ones about money.21% less likely to have their personal relationships impacted due to concerns about money
Improved healthIOOF white paperConsumers who do not receive professional ongoing advice are 22 per cent more likely to have their sleep disrupted due to concerns about money than non-advised clients.

The Rice Warner report can be found here.

New Zealand Experience

In New Zealand the Financial Services Council has conducted research into the value of Financial Advice: “The good news is, the value of advice does clearly outweigh the cost. Those who are advised are delivered a 4% increase in investment returns, about 52% more in their KiwiSaver and save 3.7% more for their retirement than those who are unadvised.

Their report can be found here.  And is also covered in this article by NZ Adviser online.

Please read my Disclosure Statement

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

Source Agile Finance Radio


Thinking of the Upside – Dream a Little – Promoted New Zealand as a Tourist Destination – Tongariro Alpine Crossing

With the roll out of the covid-19 vaccine started around the world, it is time to think about the upside…… and to start dreaming a little.

Over the next few months, I would like to help promote New Zealand as a great destination to visit once international travel recommences (hopefully within the next year).  We live in a wonderful, clean, and diverse country.

This is a departure from what is an Investment focused Blog (which I will do occasionally and have done in the past).

Investment related Posts will continue uninterrupted however.

For my offshore followers start planning a trip down under, dream a little.  It would be great to see you.

For those here in New Zealand, as you will know, it is a great to time to see New Zealand and support the local tourism industry, as many of you have been this summer.

Tongariro Alpine Crossing

The Tongariro Alpine Crossing is one of New Zealand’s, if not the worlds, most popular one day walks.

The landscape and scenery are very different to other parts of New Zealand, as you will see from future Posts.

For more information on the Tongariro Alpine Crossing and the Tongariro National Park see below.

The crossing is a short, on average 6-8 hours, walk through a volcanic landscape, including crossing large craters and calderas, seeing emerald lakes, steam rising from mountain sides, and the smell of sulphur (luckily not for long!).  The track covers 19.4km (12 mile).

Photo below, starting out, looking up toward Mt Ngauruhoe, elevation 2,291m (7,516 ft).  Mount Ngauruhoe – Wikipedia

It may look familiar to Lord of the Rings fans, Mount Doom.

Photo below is looking back toward the start of the track at the Mangatepopo Carpark, which is at a 1,120m elevation. 

The track climes the Mangatepopo valley to the saddle between Mount Tongariro and Mount Ngauruhoe.

The highest point on the track is at the Red Crater, see below, at 1,886m. The trek finishes at the Ketetahi carpark, 750m elevation – overall you do more down hill than up hill!

Below, views on the way up! Spectacular, an old lava field.

Views near the top, looking toward the South Island.

Can almost touch it and near the half way point, after crossing the south crater.

Landscape and views from near the top. Red Crater, big photo below.

Views of the Blue lake (in the distance) and first sighting of the Emerald Lakes (smaller photo on right below).

And the Emerald Lakes, strong smell of sulphur here.

Heading down, after crossing the central crater and walking alongside the Blue Lake.  In the photo below Lake Taupo is in the distance.  Lake Rotoaira is the small lake in the foreground.

Background Tongariro Alpine Crossing

As mentioned above, the Crossing is 19.4km trek.  

It is a point to point hike, there are several companies that provide shuttle services to make your day easier.

They will pick you up in National Park (small town nearby), dropping you off at Mangatepopo carpark, start of walk, collect you at the end of the days walk from the Ketetahi carpark, and return you to National Park. A very good service.

For further information on Tongariro Alpine Crossing, Tongariro Alpine Crossing Track | National Park | Walks & Hiking | Shuttle | World Heritage (


Tongariro Alpine Crossing Summer brochure (

The Tongariro Alpine Crossing is situated in the Tongariro National Park.

Tongariro became a National Park in 1887 and boasts dual World Heritage status.  It is New Zealand’s oldest National Park.

In 1990 the Park was recognised as a World Heritage Site for its outstanding natural values.

In 1993, Tongariro National Park became the first place in the world to be listed as a World Heritage Site for the spiritual and cultural values the landscape possesses for the indigenous people in the area.

The Park includes three active volcanoes Tongariro, Ngauruhoe and Ruapehu.

For more information: Tongariro National Park – Wikipedia

I hope you get to visit the Tongariro National Park, the surrounding towns, landmarks, attractions, and have time to complete the Tongariro Alpine Crossing. Please read up on the crossing and prepare accordingly. It is an alpine crossing and caution should be taken, a watchful eye on the weather is particularly important.

My 13 year old son and I completed the crossing in 4hrs, 40 minutes, including the odd stop and a lunch break. Teenage boys tend to be in a hurry!

Please read my Disclosure Statement


Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

Most read Kiwi Investor Blog Posts in 2020

The most read Kiwi Investor Blog Posts in 2020 have been relevant to the current environment facing investors.  They have also focused on building more robust portfolios.

The ultra-low interest rate environment and sobering low return forecasts present a bleak outlook for the Traditional Balanced Portfolio (60% Equities and 40% Fixed Income.)  This outlook for the Balanced Portfolio was a developing theme in 2020, which gained greater prominence as the year progressed.

In essence, there are two themes that present a challenge for the Traditional Balanced Portfolio in the years ahead:

  1. That fixed income and equities (mainly US equities) are expensive, so now may not be a great time to invest too heavily in these markets; and
  2. With interest rates at very low levels, there is increasing doubt that fixed income can still effectively protect equity portfolios in a severe market decline in ways they have done historically.

My highest read Posts address the second theme above.

The Balance Portfolio has served investors well in recent years.  Although equities and fixed income still have a role to play in the future, there is more that can be done.

The most read Kiwi Investor Blog Posts outline strategies that are “more that can be done”.

I have no doubt investors are going to have to look for alternative sources of returns and new asset classes outside equities and fixed income over the years ahead.  In addition, investors will need to prepare for a period of higher inflation. 

Not only will this help in increasing the odds of meeting investment return objectives; it will also help protect portfolios in periods of severe sharemarket declines, thus reducing portfolio volatility.

The best way to manage periods of severe sharemarket declines, as experienced in the first quarter of 2020, is to have a diversified portfolio.  It is impossible to time these episodes.

Arguably the most prudent course of action for an investor to pursue in the years ahead is to take advantage of modern investment strategies that deliver portfolio diversification benefits and to employ more advanced portfolio construction techniques.  Both of which have been successfully implemented by large institutional investors for many years.

From my perspective, maintaining an array of diversification strategies is preferred, investors should diversify their diversifiers.

The most read Kiwi Investor Blog Posts in 2020 were:

Posts closely following were Understanding the impact of Volatility on your Portfolio and Optimal Private Equity Allocation.

Thank you all for you continued support and all the best for the year ahead.

Please read my Disclosure Statement


Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

Monthly Financial Markets Commentary and Performance– December 2020

The latest monthly commentary, for March 2021, can be found here.

Cautious Optimism

  • Caution optimism prevailed across markets and economies as the global annus horribilis ended.  Wishing you all an annus mirabilis for 2021 (a wonderful year).
  • Global markets finished the year buoyed by the commencement of the Covid-19 vaccines roll out, ultra-low interest rates, and finally a new US government spending package.
  • Global equities climbed 4.9% in December and are 16.9% higher than at the end of 2019.  Who would have thought that was possible after the near 30% declines earlier in the year? 
  • The US sharemarket ended the year at historical highs.  The S&P500 returned 18.4% in 2020 and is almost 70.0% higher from its yearly lows in late March.
  • The New Zealand sharemarket also finished the year strongly, rising 5.5% in December, returning 14.7% in 2020.  This is the Index’s ninth consecutive year of positive returns.  The benchmark has more than quadrupled since the end of 2011, and more than doubled since 2015! (benchmark returns are based on S&P Dow Jones Index data).
  • The Australian sharemarket returned 1.2% in December, eking out 1.4% for the year.  The Information Technology sector posted a 9.5% gain in December and 57.8% for the twelve months period.  The energy sector lost 27.6% for the year, and utilities fell 16.7% over the same period. These sector relative performance outcomes have been experienced internationally, along with the momentum and growth factors outperforming value over the last twelve months.  Although growth and momentum outperformed value in December they have trailed value over the last three months of 2020.  In Australia, value returned 18.1% over the last quarter of 2020, momentum and growth returned 7.8% and 10.1% respectively.
  • The V shape economic recovery is well on track around the world.  The New Zealand economy expanded a stronger than expected 14% in the third quarter of 2020.  This follows a historical 11% contraction in the second quarter.  The economy is 2.2% smaller compared to a year ago.  Construction and retail trade led the recovery following the second quarter lockdown.  As the Kiwi Bank economics team highlighted, 95% of New Zealand’s economy is doing well, but the other 5%, primarily the tourism and education sectors, are not, and we should spare a thought for them.  The peak over the Kiwi summer period, December – March, will be a test for them. 
  • As mentioned above, the USA has instigated additional government spending to combat COVID-19.  The relief package is worth around $900 billion, 4% of the economy.  It was larger than many expected and includes $600 personal payments to most Americans, along with additional unemployment benefits, and further support for businesses.  This package should help to support US economic activity over the first quarter of 2021.
  • Japan also announced additional economic stimulus measures in early December, this includes around 30 trillion Yen in additional spending to prevent the spread of COVID-19, transform the economy post the pandemic, and enhance infrastructure.  The Japanese economy grew 5.3% in the July – September period, after declining 8.3% in the second quarter.
  • Chinese industrial profits have grown 15% over the last year and exports are booming.  Over the twelve months ending November Chinese exports have grown 21%, the highest level of annual growth in almost 10 years. 
  • European manufacturing activity has been stronger than expected, suggesting fourth quarter economic activity is going to be higher than anticipated. 
  • Likewise, US manufacturing has been resilient at a time of rising COVID-19 cases.
  • In Australia, Consumer sentiment has reached its highest level in 10 years.
  • The UK and Europe have agreed on a post-Brexit Free Trade Agreement that will result in zero tariffs and quotas on goods that comply with rules of origin.  Terms on trade in services have also been reached, which are flexible reflecting the closeness of business activities.

The Year ahead

  • Although economic activity is expected to moderate in the fourth quarter of 2020, given rising COVID-19 cases, complicated by the northern hemisphere winter, consensus expectations are for just over 5% global economic growth in 2021, led higher by Europe, UK, China, and India.
  • After a sluggish start to the year the global economy should accelerate due to the rollout of the vaccines, and mass immunisation reduces the virus threat, the continued accommodative central bank policy settings of ultra-low interest rates, and government spending packages.
  • More than 12 million vaccine doses have been administrated in 30 countries so far.  Israel is leading with 10.5% of their population vaccinated.  America has given out 4.3 million doses, 1.3% of their population.  A World Health Organisation linked plan is in place to administer 2 billion vaccine doses globally in the first half of 2021.
  • The US Federal Reserve’s (Fed) adoption of a flexible average inflation targeting will see global interest rates remain low for some time.  The Fed is not expected to raise interest rates until 2025.
  • In this environment, global equities are more than likely to outperform in the year ahead, global bond yields rise moderately, and the US dollar weakens further.  Emerging markets are well placed in this environment, the value factor will benefit from greater economic certainty in 2021, and commodities such as oil may also find greater support.
  • In America, Georgia Senate run-off elections in mid-January provide a short-term focal point for markets.  The result will determine control of the US Senate.  A switch to a Democratic party-controlled Senate will likely see changes to US tax policies in the months ahead.
  • Inflation, although anticipated not to be an issue over the next few years, will become more of a threat in later years. 
  • Investors should prepare themselves for the risk of higher inflation as outlined in these Kiwi Investor Blog Posts: Preparing your Portfolio for a period of higher inflation and Asset Allocations decisions for the conundrum of inflation or deflation


Source: Man

Please read my Disclosure Statement

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.