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Five key questions for investors in 2021. Market Insight Report.
A note from our The questions are:
01. Will distribution of vaccines end
Chief Investment the COVID-19 pandemic in 2021?
Officer 02. Will governments withdraw
fiscal support now a vaccine
pathway is more certain?
03. Will central banks maintain
loose monetary policy even as
economies recover?
04. Will the housing market continue
Wayne Gentle to appreciate?
Chief Investment
Officer 05. How will investors respond to
very low interest rates?
After a tumultuous 2020, we turn our thoughts The answers to these questions will be key
to what 2021 might bring for investors. As the inputs into our asset allocation discussions,
past year showed, evolution of events can i.e. where we choose to increase or reduce
quickly render forecasts and expectations investments. Importantly, they will also
worthless. Furthermore, even if we knew the inform our company selection decisions as
details of how the pandemic was going to the winners of the past year may not be the
unfold, picking the correct response of asset winners of next year.
markets would have been very difficult.
After a year of huge uncertainty, the next year
With this in mind, we take a humble approach is unlikely to see such upheaval. The global
to forming an outlook – there will be no economy will hopefully continue to recover
forecasts of financial markets that quickly and normalise after a pandemic disrupted
become obsolete. However, learning from the year. However, this does not mean a straight
experience of this year, we have identified line for financial markets and fund returns
what we think will be the major drivers of - we will see further volatility. As active
financial markets over the course of 2021. managers, we continually reassess the outlook
and reposition our funds accordingly.
These key drivers are posed as questions.
We don’t presume to know the answers, We look forward to meeting the investment
but we instead outline why each question is challenges that 2021 brings. We hope that
important for investors and what we will be you find this insight into our thought process
looking for to determine the answer over the informative, useful and thought provoking.
course of the year.
Wishing you all the best in 2021.
Utilising the depth of Milford’s investment
team, these questions have been posed to
subject matter experts across the team. As
we move through the new year, we will be
looking to these experts to help guide our
internal investment decisions, particularly Wayne Gentle
as new information comes to light. Chief Investment Officer
Milford
The material contained herein is based on information believed to be accurate and reliable although no guarantee can be given that this is the case. This is intended to provide
general information only. It does not take into account your investment needs or personal circumstances. It is not intended to be viewed as investment or financial advice.
Before making any financial decisions, you may wish to seek independent financial advice. Past performance is not a reliable indicator of future performance. Read the relevant
Milford Product Disclosure Statement at milfordasset.com. 2
01
Will distribution
of vaccines end
the COVID-19
pandemic in 2021?
Compared to what was anticipated six months ago, the timeline and
efficacy of COVID-19 vaccines has far exceeded expectations. We’ve
identified three key factors we believe will materially influence the
trajectory of the pandemic in 2021.
Firstly, how many doses of the vaccine This leads to a second important
can be produced? question – once the vaccine is made
Marissa Rossi The eight leading vaccine developers are available, what percentage of people
Head of projecting they will together deliver 37 million will choose to be vaccinated?
Sustainable vaccine treatments in 2020 and a further Recent surveys in the US suggest up to
Investment
5.6b in 2021 – enough to vaccinate 70% of one-third of respondents do not believe
the global population. Perhaps unsurprisingly COVID-19 is real. One in six British people
given the astronomical scale and expedited surveyed say they are unlikely to agree
timeline, estimates from Pfizer and to COVID vaccination, while a similar
AstraZeneca for the initial quantities of doses proportion remain undecided. Vaccine
to be delivered have slipped significantly hesitancy is unfortunately likely to increase
from what was promised only a few months as the impact of side-effects such as fever
ago. Pfizer has cited issues with raw material and soreness at the injection site become
supply and AstraZeneca is having challenges additional deterrents. And, as was the case
with its UK manufacture. While this likely 20 years ago with the roll-out of Merck’s
results in delays of only a few months, it cervical cancer vaccine, there will likely be
highlights the logistical challenge in terms of isolated, but widely reported, terrifying
scale, distribution and timeline for vaccine tales of more severe adverse reactions.
delivery in 2021.
Five key questions for investors in 2021. 3
01 Will distribution of vaccines end
the COVID-19 pandemic in 2021?
Pleasingly, in Australia and New Zealand, The third critical piece of the 2021 puzzle
evidence suggests almost 80% of the we’ve identified is, will vaccines protect
population would be willing to receive a against infection and transmission, or
COVID-19 vaccination if it were available, only against the symptoms of disease?
which, together with a highly efficacious If protection against severe disease symptoms
vaccine, puts our countries and is enough to reduce hospitalisations and
economies in a very strong position. deaths, does it even matter? Perhaps
surprisingly, in the short term, the answer to
this question has meaningful implications for
Percentage of people willing to how long COVID-19 restrictions will be in place.
get vaccinated if a vaccine were
Take the example of healthcare workers who
available (as of October)
are rightly first in line to be vaccinated. While
those doctors and nurses can be safe in the
India 87
knowledge that even if infected, they are
China 85 highly unlikely to develop severe symptoms,
if COVID-19 infection and transmission
S. Korea 83
remain possible despite vaccination, they
Brazil 81 must continue to take precautions such as
mask wearing and social distancing, to avoid
Australia 79
becoming super-spreaders. We know this will
UK 79 be true for all early vaccine recipients, but
raises further questions – at what point will a
Mexico 75
large enough portion of the population have
Canada 76 received vaccination so that social distancing
Germany
is no longer necessary? What if only 50% of
69
the population are prepared to be vaccinated
Japan 69 at all? As a population, can herd immunity
S. Africa 68
ever be achieved if vaccine recipients remain
vulnerable to infection and are still capable of
Italy 65 passing it on?
Spain 64 The answers to these questions will unfold
US 64 over the coming months. But two things
are certain. The scale of human endeavour
France 54
that went into developing, testing and
Total 73 manufacturing highly efficacious vaccines
in such extraordinary quantities, just twelve
months from the discovery of a novel human
Source: Ipsos, virus, is awe inspiring. Secondly, as 2020 draws
J.P. Morgan
economics.
to a close, we can be confident that, from the
perspective of the pandemic, the year ahead
will be an easier one than the year we are
leaving behind.
Five key questions for investors in 2021. 4
02
Will governments
withdraw fiscal
support now that a
vaccine pathway is
more certain?
In 2020, governments around the world rolled out ad-hoc wage
subsidies, business grants and loans, and even universal cash handouts.
Notably, GDP (gross domestic product) of developed economies saw
+4.5% points uplift from fiscal stimulus, alleviating about half of the
pandemic hit. Importantly, meaningful, decisive policies arrested a
potential collapse in confidence that could have led to other dominoes
Felix Fok falling as uncertainty rose. While not completely out of the woods,
Portfolio government action has helped avert the worst possible outcomes.
Manager
Looking forward, the expectation for 2021 misallocation of taxpayer funds. For this
is for total government spending to decline reason, policymakers prefer automatic
year on year – a ‘fiscal drag’. Aid packages buffers, such as unemployment benefits.
typically have end dates. Non-renewal of If the anticipated recovery takes hold
an expiring programme would be a natural in 2021, government spending on
cause for spending to decline. Historically, benefits should decline through rising
the ‘three Ts’ have guided the design of employment.
emergency aid: Timely, Temporary, and
Still, the threat of second virus waves is
Targeted; with the first two criteria proving
real and countries in Europe and Asia
easier to achieve than the last. Indeed, poorly
have reverted to near full lockdowns
designed early stimulus programmes could
in recent months. Governments will
hold back approval of future packages
be sensitive to pain on ‘Main Street’
as opponents seize upon the narrative of
Five key questions for investors in 2021. 5
02 Will governments withdraw
fiscal support now that a vaccine
pathway is more certain?
and could reinvigorate spending even if a Governments round the world
vaccine is forthcoming. The question is ‘how
will be threading a fine needle;
much pain is needed?’ The answer depends
in large part on the politics of that country. early removal of support could
For example, at time of writing, the split threaten the recovery. Conversely,
US Congress continues to haggle over the too much stimulus could lead
proposed third COVID-19 aid package that
to economies overheating with
started negotiations in July. Nonetheless,
acceleration of spending on infrastructure adverse impacts of inflation and
in the widest sense with promise of future subsequent monetary policy
productivity gains appears to be likely in tightening. Consequently, fiscal
most countries.
policy will be a key area of focus
Fiscal spending has historically buffered for investors in 2021.
economies in downturns and tends to be
counter cyclical. It is natural to expect
fiscal spending to be a drag if economies
rebound. Things to watch would be
reacceleration in virus cases and job losses,
which could lead to the passage of new
spending programmes. Otherwise, surprises
could come from proponents of left-leaning
concepts like universal basic income.
“Historically, the ‘three Ts’ have guided
the design of emergency aid: Timely,
Temporary, and Targeted.”
Five key questions for investors in 2021. 6
03
Will central banks
maintain loose
monetary policy even
as economies recover?
Most developed world central banks operate in the context of a set
of policy targets. These targets differ between central banks, but the
overarching common denominator is stable consumer price inflation
(typically CPI in the region of 2%), but also now increasingly, maximum
sustainable employment. To contemplate how monetary policy may
develop as economies recover, we must therefore consider how
Paul Morris inflation and employment will likely develop.
Portfolio
Manager Targeting inflation
The initial phase of the COVID-19 pandemic recovery. Historically that has led to central
was undoubtedly disinflationary (lower bank policy tightening. Now however,
CPI). As time progressed some sectors (e.g. after years of lower than target inflation,
goods) experienced a recovery in inflation central banks appear willing for inflation to
as demand improved but logistics networks run higher than target (albeit temporarily)
and manufacturing remain strained. Looking before tightening policy. Indeed, the US
into 2021, a successful vaccine deployment Federal Reserve earlier in 2020 changed its
into a backdrop of potential pent up inflation target to reflect this, specifically
demand could further broaden this inflation targeting average inflation of 2% over time.
Five key questions for investors in 2021. 7
03 Will central banks maintain
loose monetary policy even as
economies recover?
Targeting maximum employment Policy to remain extraordinarily
The crisis caused a dramatic increase in accommodative
unemployment. Some sectors recovered In the near term, many central banks will
as economies reopened but many remain remain more concerned with downside
deeply scarred, especially services economic risks than the threat of emerging
such as tourism and hospitality. It is inflation. That means predispositions remain
also proving difficult to determine true for more, rather than less policy action, even
levels of unemployment given myriad if the efficacy of further accommodation
government payroll support schemes. is arguably waning. Many central banks
Pre-crisis, central banks were already have provided clear guidance that official
revising lower expectations of the cash rates will not rise for several years
sustainable unemployment rate that and that quantitative easing programmes
would be inflationary. Since the pandemic, will continue well into 2021. Most believe
central bank rhetoric has increasingly financial stability risks, another objective
emphasised policy will be driven by actual for many central banks, from elevated
unemployment, rather than its expected asset prices (in part caused by low
future path. Combined with an acceleration rates) is less than the risk from elevated
in structural employment changes in some unemployment (which could cause stress
sectors (e.g. retail ecommerce) central due to bad debts).
banks may therefore err on the side of
This all points to central banks retaining
caution, waiting for unemployment to
extraordinarily loose policy settings, even as
fall across a truly broad demography.
economies recover, which should continue
to be supportive for asset prices. Investors
will however be extremely sensitive to
even the inference that central bank policy
settings could change.
“In the near term, many central
banks will remain more concerned
with downside economic risks than
the threat of emerging inflation.”
Five key questions for investors in 2021. 8
04
Will the New Zealand
housing market
continue to appreciate?
The New Zealand housing market proved to be incredibly resilient in
2020, contrary to many predictions when COVID-19 first appeared.
Our median house price is at record highs nationally (and across
several regions), and total volume transacted in recent months has
also been at historically high levels.
Sam Median property price change (%, year on year):
Trethewey
30.0%
Portfolio
Median property price Y on Y change
Manager 25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
New Zealand
-5.0% Auckland
New Zealand
-10.0% ex. Auckland
2013 2014 2015 2016 2017 2018 2019 2020 Source: REINZ
Five key questions for investors in 2021. 9
04 Will the New Zealand housing
market continue to appreciate?
What are the drivers of the market appreciation? In our view, the
housing market has been supported by three key factors:
1. L
ower interest rates: the RBNZ Looking ahead into 2021
reduced the official cash rate from 1.00% Looking ahead, we will be watching
to 0.25% in March and banks have since closely for signs of change. This means
followed with mortgage rate reductions closely monitoring the housing market
and lower term deposit rates. This has strength, its flow-on impact on the
improved affordability for many first economy, and considering how that is
home buyers and forced some investors likely to influence the RBNZ’s decisions
who may have previously held term on interest rates. There is a risk that the
deposits to look for alternatives like RBNZ may decide to try and take the
housing. steam out of the market with renewed
lending restrictions (e.g. officially imposing
2. Pent-up demand: Largely first
higher LVR limits on investors) or via other
home buyers who have struggled to
macro prudential measures. In addition,
enter the market for many years have
continued first home buyer participation
sought to purchase following the March
is also important to see growth in value
lockdown. The demand has likely been
remain a feature. Finally, on the issue of
compounded by some New Zealanders
limited supply, any material changes to
returning home from overseas due to
land availably and possible changes to
COVID-19.
the Resource Management Act should be
3. Limited supply: This is a well-known watched; however we would not anticipate
issue in New Zealand. Housing stock a quick fix solution to supply issues.
growth has not kept up with population
growth, particularly in the major centres,
in recent decades.
As active fund managers, the housing
market provides important signals for
us about the health of our economy and
investor appetite for risk. A strong housing
market has significant flow-on effects to the
wider economy, supporting confidence and
spending by consumers and businesses.
Five key questions for investors in 2021. 1005
How will
investors respond
to very low
interest rates?
Investors need to look for alternatives Lower interest rates boost short-term
to cash and term deposits market returns but lower long-term
Low and close to zero interest rates mean returns
investors need to look for alternatives When interest rates fall, the valuations
to cash to generate decent returns on investors are willing to pay for shares
their savings. These alternatives include generally increases. For example: if a
shares, company debt (corporate bonds) company was paying a dividend yield of
or investments into managed funds that 7% and because of a fall in interest rates,
Jonathan invest in company shares and fixed income investors were happy to receive a yield of
Windust securities. 5%, the value of the company would need
Portfolio to rise by 40%.
Manager To achieve those higher returns,
investors will need to take more risk Unfortunately, once the capital gain has
Unfortunately, investing in these alternatives been received, the future return from
requires taking on more risk and complexity. holding the investment will be lower by
The returns from shares and managed around 2% p.a.
funds are not fixed - they are reliant upon
Following strong gains in share markets in
company profits and the value that share
recent years we expect returns to be lower
markets place on these profits. Accordingly,
in the future – dividend yields are already
investors must be prepared for ups and
lower. However, we believe that shares
downs in the value of their investments
should still generate a higher return than
and be willing to take a longer-term view.
cash over the medium-term.
Investors should carefully consider their
tolerance for risk when selecting their
investment strategy.
Five key questions for investors in 2021. 1105 How will investors respond to
very low interest rates?
For share markets, ultra-low rates Low rates increase the importance of
potentially increase volatility good active investment management
Given a large part of share market returns We believe lower rates increase the
has been created by lower interest rates importance of active investment
(and therefore higher valuations), markets management. In an environment of low
may be vulnerable to sharp rises in interest returns, any additional returns above
rates. Additionally, given the current low passive investment returns become
level of rates, the ability of central banks increasingly valuable. Additionally, the
to lower rates further to help cushion ability to manage risk becomes more
future economic and market falls has important when asset valuations are
fallen. Global central banks have looked high and growth is low. Investors in well
to address this by using other tools such managed active funds should take comfort
as buying longer-dated bonds – however that the manager is monitoring the risks of
these solutions are less proven. their investments and investing where they
believe they will be rewarded for taking risk.
However, it is important that investors in
actively managed funds carefully consider
the credentials of the manager they
choose and the risk profile of the fund
they invest in.
“Low and close to zero interest
rates mean investors need to look
for alternatives to cash to generate
decent returns on their savings.”
Five key questions for investors in 2021. 120800 662 345 milfordasset.com KiwiSaver Investment Funds Private Wealth & Advice
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