March 2020 - BAY OF PLENTY BUSINESS NEWS

6 BAY OF PLENTY BUSINESS NEWS March 2020
Optimistic start for investment markets
Investment Market Update, quarter ended 31 January, 2020
Inflation remains subdued, central banks remain committed
to low interest rates, and trade tensions between the US and
China have de-escalated (for now) with the signing of a Phase 1
trade agreement in mid-January.
WHAT TO DO WITH YOUR MONEY
> BY BRETT BELL-BOOTH
Investment Adviser with Forsyth Barr Limited in Tauranga, and
an Authorised Financial Adviser. Phone (07) 577 5725 or
email brett.bell-booth@forsythbarr.co.nz.
The progress in trade negotiations
between the
world’s two largest economies
appeared to have helped
stimulate improved economic
activity highlighted by improved
commodity prices and
better manufacturing data.
Consumers remain an economic
strength in most developed
markets. Jobs are plentiful,
and real wages and salaries
are rising. Low interest rates
have reduced debt servicing
costs, and strong asset prices,
including for housing, have
made consumers feel wealthier.
Consumers will continue
to spend (outside of coronavirus
fears), and housing construction
is buoyant.
But then came along
coronavirus
Markets don’t like uncertainty,
and coronavirus was an unanticipated
risk.
Health-scares impact economic
activity through factors
such as people spending and
travelling less. If it becomes
significant enough – such as
the coronavirus – quarantine
measures are put into effect
and places of work are closed.
China has quarantined an
estimated 60 million people
and extended the annual Lunar
New Year holiday beyond the
traditional one-to-two week
celebration period. Because
coronavirus is centred in China
where so much of the world’s
manufacturing is based, work
closures can disrupt global
supply chains meaning companies
around the world are
not able to obtain products
and services essential to their
businesses.
No one knows how far
and wide the coronavirus may
spread, and therefore what the
impact on global markets may
be. Other recent series viral epidemics
include SARS (2003),
MERS (2012), Zika (2015-
2016), and Ebola (2018).
The most comparable to the
Wuhan coronavirus is SARS,
which infected thousands
across the Asia Pacific region.
At the start of that epidemic,
the regional global equity
index (MSCI Pacific ex Japan)
dropped -13 percent. In the
US, equities dropped as much
as minus five percent. Markets
did not fully recover until the
virus was contained. China is
now a far larger contributor to
the global economy than it was
in 2003, so the threat the virus
represents is more significant
today. However, if the coronavirus
follows the pattern of
previous epidemics, then the
economic impact will be relatively
short-lived.
Investors still need
returns
The dominant influence on
markets since the beginning
of 2019 has been the world’s
central banks’ commitment to
low interest rates. Last year
the markets climbed a wall of
worry to deliver exceptional
returns despite headline-grabbing
risks such as trade wars,
Brexit, Hong Kong protests,
and US-Iran tensions.
In a world of ultra-low interest
rates, we suspect equities
will likely continue to be
supported by the “TINA” effect.
For many investors “there
is no alternative” (TINA) to
equities to generate an acceptable
investment return. Meaning,
as we have seen in early
February, any pullback in equity
prices will likely be met
with good buyer demand.
Mergers and
acquisitions remain a
feature of the market
An additional consequence of
low interest rates has been a
sharp resurgence in corporate
merger and acquisition (M&A)
activity. 2019 saw a number of
companies acquired and delisted
from the NZX, including
TradeMe, Methven, Orion
Healthcare, and SLI Systems.
Late last year the boards of
both Abano Healthcare and
Metlifecare recommended
takeover offers, which are
pending shareholder approval.
And this year Augusta Capital
has followed suit.
Conditions remain ripe for
M&A activity to continue.
High stock prices provide
companies with a strong takeover
“currency”, interest rates
and funding costs are low, and
private equity funds around
the world have record levels
of cash they are looking to
deploy.
Diversification is the
best risk management
tool
Equity markets finished 2019
very strongly and that momentum
carried on into 2020. The
recent volatility due to coronavirus
concerns should be
taken in that context. Interest
rates remain historically low
and central banks are expected
to provide further support to
markets if needed this year.
The outlook for global corporate
earnings remains positive
although we expect companies
will now be more conservative
around their outlooks.
The future is inherently
uncertain, and markets can always
face unexpected shocks.
Diversification remains the
key risk management tool. We
recommend clients maintain a
balanced approach with diversified
exposure to both equities
(across a range of geographies
and industries) and high-quality
fixed income. This helps
cushion short-term volatility
while also offering the potential
to capture long-term capital
growth.
This column is general in nature
and is not personalised investment
advice. This column has been prepared
in good faith based on information
obtained from sources believed
to be reliable and accurate.
Disclosure Statements for Forsyth
Barr Authorised Financial Advisers
are available on request and
free of charge.
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