NZ market still not 'tempting'
A decline in the rate of decline is not the same as a rebound, AMP Capital’s head of investment strategy says – and equity investors should remain focused on the quality of their investments.
Wednesday, April 29th 2020, 10:40PM
Greg Fleming
AMP Capital has released its latest Quarterly Strategic Outlook.
In it, it said the recession was unlike anything ever seen before – particularly because of the speed of contraction in activity and the weakness in markets that went with it.
"In early March we revised our global growth forecast down from 3.2% to 2.7% as the virus looked largely contained to China. By mid-April we were expecting the worst global recession since World War II."
But while international markets had fallen sharply in March, they had also rebounded.
That had prompted questions about whether there was too much optimism.
AMP Capital’s head of investment strategy Greg Fleming said while the markets had seemed overvalued before Covid-19 on most P/E measures, they had still not returned to "tempting" levels.
Investor confidence had been buoyed by unprecedented government intervention around the world, he said.
That government backstop of credit risk had supported values but "at some point that will have to be removed".
There might be more realistic prices in the middle of the year when government supports came off.
Markets were not pricing in a second wave of global infections, he said.
But a levelling off did not mean that it was time to jump in, he said. "A decline in the rate of decline is not the same as a rebound."
Investors would need to make sure they were happy with the balance sheet quality of their investments. A recession in profits could last longer than a consumer activity recession.
AMP Capital had taken a neutral stance on equities, he said. The downturn had pushed it underweight but the recovery had returned it to neutral.
Central banks around the world had stamped out any sign of economic weakness in the past decade, AMP Capital said.
"That has us concerned about the quantum of business failures we may see out of the current disruption in activity. For firms that went into the lockdown in an already fragile state, fiscal support may not be enough to save them. The positive spin on that is that marginal firms fail during the recession, freeing up resources for new firms to emerge during the recovery."
The June quarter would bring the biggest ever decline in New Zealand economic activity.
"As with much of the rest of the world, the New Zealand economy was already slowing as Covid-19 reared its head, but that slowdown was not due to the build-up in any significant imbalances that suggested recession was imminent.
"So when the recovery comes, it will be relatively swift, though not as swift as the decline. Recovery will only build as we progress gradually back down the alert levels.
"What does this mean for portfolio strategy? While the market rebound that we have seen so far may be sustained when the epidemiological outlook improves sufficiently and money moves out of panic-driven cash and government bond allocations again, there are still more fundamental problems that remain to be properly addressed in equity capital markets. Thus, while we may adopt short-term positioning to take advantage of very beaten-down asset prices in general, we will take a cautious approach to the growth asset classes in subsequent quarters."
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