Investment market performance
Market update – quarter ended 31 December 2020
The COVID-19 pandemic that swept across the globe has shocked economies around the world and resulted in the deepest and sharpest global recession since the Second World War. After lurching in and out of lockdowns of their populations, governments in many countries have been unable to contain the spread of the virus which has proved to have devastating health and economic consequences. With more than 100 million identified cases and in excess of two million deaths at the time of writing, the health emergency continues to spiral out of control in many countries. However, the beginning of 2021 marked the first large scale vaccination programmes which will hopefully soon start to slow the spread of the virus and allow economies to begin to function more normally.
The rapid spread of the virus earlier in the year contributed to panic and sharp declines in shares and fixed interest securities during February and early March as investors dramatically retreated from markets. However, even as economies around the world crashed, investment markets recovered strongly as central banks cut interest rates and injected massive liquidity. Simultaneously governments initiated huge spending programmes to combat the economic impacts of the virus. Remarkably, many companies and sectors of economies have thrived, and some areas of the share markets, most notably the large technology and consumer stocks of the US (e.g. Amazon, Netflix and Apple), delivered exceptionally strong returns in 2020.
Continuing the recent trend, both US and New Zealand share markets had very strong years in 2020. These markets represent a large portion of the Fire Service portfolios and contributed positively to member returns. For the September through December quarter, New Zealand shares (as measured by the S&P/NZ 50 Index) advanced more than 11% while global shares gained more than 12% (as measured by the MSCI All Country World Index – New Zealand dollar hedged). Share markets in Europe, while significantly up on the March lows, are in some cases still down on the year, with the Brexit travails remaining an ongoing concern for investors in UK markets. Likewise, shares in sectors that were hit hardest by the lockdowns, for instance travel and entertainment, have suffered tremendously.
Global fixed income delivered returns of almost 1% for the quarter (as measured by the Bloomberg Barclays Global Aggregate Bond New Zealand dollar hedged) and was up more than 5% for the year as corporate bond prices recovered from the March lows and government bond prices moved higher.
After a traumatic year for so many, members that have stayed the course with their investments should feel reasonably pleased with the level of returns. Conservative delivered a return of 2.1% for the quarter and 5.6% for 2020, while Balanced delivered 4.7% for the quarter and 5.9% for the year and Growth returns were 6.5% and 5.6% for the same periods.
From an investment perspective, 2021 has gotten off to a good start too, with many growth assets delivering strong returns for the month of January. The Conservative, Balanced and Growth options returned 0.2%, 0.7% and 1.3% respectively to members in January.
The distribution of vaccines is likely to make 2021 a year of global economic recovery. While markets have priced in a fair amount of the good news, more gains seem possible as corporate profits rebound and central banks maintain accommodative monetary policies. With the world in the early post-recession recovery phase of the business cycle, the medium-term outlook for economies and corporate earnings is positive. We believe 2021 will feature an extended period of low-inflation, low-interest-rate growth that favours growth assets such as shares over defensive assets such as fixed interest securities.
However, there are some significant near-term risks. Investors may have become overly optimistic on shares and the global economy more broadly following recent vaccine announcements. This makes markets more vulnerable to negative news, which could take the form of a resurgence in COVID-19, significantly weaker than expected economic growth and corporate earnings or a return of high inflation.
The benefits of holding globally diversified portfolios were clear in 2020 given the wide range in returns from different sectors, countries and asset classes. Investing in assets around the world remains a key investment strategy for the various member options (except the cash option), with assets spread across global fixed interest securities, shares, infrastructure and real estate.
1 Returns net of fees and tax at 28%.
25 March 2021