INSIGHTS

2020 was truly one out of the box. A worldwide pandemic, a global recession, and the fastest bear market (and subsequent recovery) in history. We are all hopeful the coming 12 months will be a little less eventful, although there are still plenty of important themes investors need to consider. The global economy will attempt to recover, the US will be under new management, and New Zealand could potentially move into the uncharted territory of a negative OCR. Let’s consider some of the big questions that investors face heading into 2021.

Will the ‘pandemic trade’ make way for the ‘reopening trade’?

This year financial markets have been dominated by what has been described as the ‘pandemic trade’. The best performing companies and sectors have been those which have benefitted from lockdowns, social distancing, increased online activity and working from home.

The competitive positions and growth prospects for a lot of these great businesses have only improved as a result of this year’s events. However, the prospective reopening of many economies provides an opportunity for us to take a more positive view on some of the good quality companies that have faced a challenging time in 2020, or those who will see further benefits from a more normal 2021.

Will the Labour landslide mark a significant shift to the left?

A Labour-led government never looked at risk here in New Zealand, although not everybody predicted Jacinda Ardern would garner enough support to govern alone.

With the economy still fragile and newfound support from middle New Zealand, we believe Ardern and Grant Robertson will have little appetite for dramatic changes this term.

Many of this year’s Labour voters will be close to the political centre and will have voted for the stability and continuity that Ardern and Robertson offer, rather than transformation. Having won these voters over, we think they will want to keep them onside.

Could we see a negative OCR in New Zealand?

A negative OCR is a definite possibility for 2021. The Reserve Bank has repeatedly suggested that it is part of the toolkit and has asked the banking industry to prepare for it.

However, it is not a foregone conclusion. The New Zealand economy has been performing better than many expected of late, and most economists now see this as more of a ‘line ball’ decision.

Mortgage and term deposit rates have fallen sharply in 2020, and a negative OCR would likely exacerbate this, while it could also put some downward pressure on the NZ dollar.

How might Joe Biden impact financial markets?

We think the US election outcome was a positive one for investors. Joe Biden has secured the Presidency, but the real surprise was the likely retention of the Senate by the Republican Party.

This means a divided Congress, which will limit any Democrat effort to raise taxes substantially or increase regulation. At the same time, Joe Biden will hopefully bring a more inclusive approach to foreign policy.

This latter point is particularly important for New Zealand, a small exporting nation, which relies on the global stability and relationships with the rest of the world.

With interest rates so low, are bonds still relevant for investors?

We firmly believe that bonds still have a place in portfolios. While returns will be much lower than in the past, income is still highly predictable, and investors can count on getting their capital back in full (if they focus on quality issuers).

The current backdrop (as well as the prospective returns over the coming few years) suggests tilting portfolios in favour of equities over fixed income, but not giving up completely on the latter.

This is an excerpt of an article first published in the December 2020 edition of News & Views. Craigs Investment Partners clients can view the latest edition of News & Views, which includes the full version of this article, by logging in to our Client Portal.