Monthly Commentary | March 23

Perhaps not surprisingly after the strong upturn in January, markets eased back in February. Of note is the continued high degree of correlation between equity and bond returns with both sectors posting negative returns; and both being driven largely by ongoing uncertainty around inflation and how central banks will navigate such a tricky period.

We need to get poorer collectively to meet the costs of the global COVID
shutdown, but civil unrest is present when peoples’ spending power is continually eroded by inflation. The current process is clear however, with central banks doing what is necessary to hit their inflation targets and leaving governments to deal with the inevitably unhappy voters. Ultimately the world will recalibrate to (arguably a healthier) higher interest environment, and debt-fuelled asset price increases will unwind somewhat for the benefit of ‘buyers’.

Areas where governments are likely to increase real spending will include their military capability as the world braces itself for some tense posturing between East and West – a situation which isn’t conducive to improved trade, and will also require nations to choose which side they’re backing. This is particularly relevant for New Zealand which is trying to simultaneously be friendly with its largest trading partner (China – which is a huge 1/3 of total trade and larger than the next 4 highest trading partners combined), and also be supportive of its traditional allies and intelligence partners in the ‘five eyes’ (US, UK, Canada and Australia). As is typical when markets are ‘risk off’ the NZ dollar weakened which meant that investors with unhedged global assets found some protection in their foreign currency exposure.