Monthly Commentary | May 22

Aside from some modest (temporary) respite in the NZ bond markets during May, the month provided little positive news for investors. The NZ equity market (as measured by the NZX50) fell nearly 5%, and is now down by more than 10% over the past six months. Global equity markets (as measured by the MSCI ACWI index) fell slightly during May, but are also down materially over the past six months. These losses in equity markets however are not primarily due to any significant underlying problems within the corporate sector, but rather are a pricing response to the rapidly rising interest rates. Taking a step back from the minutiae of the monthly activity, what we are now seeing is the ‘payback’ for the global COVID response.

Essentially, the world shut down a large portion of its economy (travel, hospitality being the obvious examples, but with large flow-on effects elsewhere) but instead of shrinking demand to counter this supply shock, governments across the board responded to this manufactured supply shock by printing money, lowering interest rates and paying people not to work. It should therefore come as no surprise that at the end of the ‘party’ there’s a large bill to pay – and it’s coming in the very unpleasant form of high inflation and slowing economies.

So, we now have the situation where the government is under pressure to address the ‘cost of living crisis’ (i.e. by giving people price cuts, tax cuts or more cash) whilst the central bank is mandated to crush demand by making things more expensive. In other words, what’s popular for the government to do/be seen doing, and what’s required by the central bank are pulling in completely opposite directions. Ultimately, the central banks will win, the question is at what cost and over how long. In the meantime, what we need is more supply and more growth and the quickest and easiest way to achieve this would be to bring in large amounts of skilled labour very quickly – something the NZ government is unwilling to do. Around the world, the governments which increase their supply side the most quickly and effectively will help their country recover from this crisis in the best shape.