Josh Starkey provides a round-up of what’s been happening in financial markets, with a focus on US and New Zealand election outcomes, the ongoing COVID-19 pandemic and what negative interest rates may mean for New Zealand investors.
COVID-19 is showing few signs of slowing down. Global infections are nearing 64 million, and global deaths are creeping closer to 1.5 million. The US continues to reach new daily highs in case and death numbers, and the UK has experienced further nationwide lockdowns. The consequence of this is an estimated 4.4% drop in global Gross Domestic Product (GDP), equating to around a US$6 trillion drop in economic output.
The significant level of uncertainty has led to high levels of volatility in the market. This has been particularly evident in more recent weeks in the run up to, and following, the US election. Nonetheless, US share markets remain in an upward trend from their March lows, with the S&P 500 and NASDAQ indices both hitting new all-time highs recently. Markets in the rest of the world haven’t experienced the same success – with UK and European shares down 17% and 7% respectively as ongoing Brexit negotiations add to the issues that the region is facing.
On the positive side, the International Monetary Fund projects global growth of 5.2% in 2021, resulting in GDP levels slightly above those in 2019. However, this growth projection seems reliant on the opening of economies through a vaccine, which we still await.
Elections in New Zealand and the US dominate the headlines
In New Zealand the election mirrored what was expected in pre-election polls, with a wide victory for Jacinda Ardern’s Labour Party. From the outset, it appears the party’s focus remains on beating COVID-19 and the broader impacts of the pandemic.
Meanwhile, the US election added to market volatility in November. While a number of mostly frivolous legal challenges by President Trump’s legal team continue, Joe Biden will be inaugurated as the 46th president of the United States on 20 January 2021.
The result seems to have had a positive effect on share markets in particular. With the Republican Party looking to be in control of the Senate (pending the outcome of runoff elections in Georgia), this is likely to slow the release of stimulus into the economy. Approved fiscal stimulus should be more targeted, resulting in less debt – a positive for US bonds and the US dollar.
Global interest rates and the prospect of a negative OCR
Global interest rates continue to trend lower as economic stimulus is implemented in many of the world’s developed economies. This downward trend is likely to continue into 2021 and interest rates are expected to remain low for some time.
In New Zealand, a lot of the talk has been about the possibility of the Official Cash Rate (OCR) turning negative in 2021. However recent economic data (such as New Zealand business confidence) and Finance Minister Grant Robertson’s request to the Governor of the Reserve Bank of New Zealand (RBNZ) to consider house price inflation when setting policy has made this somewhat less likely.
Following its most recent meeting recent, the RBNZ did however announce a new Funding for Lending Programme (FLP). The FLP seeks to reduce New Zealand banks’ reliance on offshore funding and deposits in order to lower the overall costs of borrowing. The impact of this will be to bring down both lending rates and those available on term deposits.
The UK is also considering the use of negative interest rates, while the US and Australia are using other monetary policy tools – such as relaxing regulatory capital and liquidity requirements, and direct lending to businesses with more flexible repayment terms.
On the one hand, the reduced cost of borrowing can support and aid economies that are struggling. On the other, the reduction in interest rates hurts investments in cash and bonds. As such, the returns from these two asset classes are expected to be lower in the period ahead. Investors in funds that have a significant weighting to cash and bonds should therefore expect that returns will be lower than previously experienced and, in the case of cash investments, could be negative.
The world is reliant on a COVID-19 vaccine
A return to ‘normal’ appears to be very much reliant on a vaccine for COVID-19. Indeed, it’s hard to see a recovery in some industries until a vaccine is both available and widely administered. Three recent clinical trials have all returned positive news and have given investors something to cheer about; these being the Pfizer/BioNTech, Moderna and Oxford-AstraZeneca trials. All three companies are now trying to fast-track regulatory approval, meaning that deliveries of the vaccine could begin by the end of this year, or early next.
That being said, the rollout of any vaccine is not going to be simple. The companies are likely to be faced with both production and supply chain issues. For example, Pfizer/BioNTech have said that they expect to be able to produce 1.3 billion doses of its vaccine in any one year. But even with some of the other companies producing and distributing their vaccines, at least initially, demand is likely to far outstrip supply. There may also be concerns amongst members of the public regarding the safety of a vaccine that has been developed so quickly – months, if not years ahead of a ‘typical’ vaccine development schedule. This may lead to some reluctance to have the vaccine administered and therefore a slower-than-expected economic recovery, particularly in some of the most affected sectors – such as travel.
The future is more uncertain now than ever. Heightened volatility is likely to remain over the coming months, but when a COVID-19 vaccine becomes widely available and political questions become answered, we should find that markets settle. When this may happen is not yet clear. But, until then, long-term investors are well placed to withstand the ups and downs the coming months will bring.
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