March saw the Coronavirus have a more tangible effect at home, with the move to lockdown in New Zealand taking it from a global event to something with a very clear impact on our day-to-day lives. Meanwhile, share markets around the world continue to be volatile, with the US S&P 500 index staging a dramatic partial 18% recovery in three days towards the end of the month.
While share market volatility can be unnerving, Fund manager’s disciplined approach, combined with strategic diversification and active management, have all worked well to ease some of the downside risks. It is this combination of strategic planning and good risk management that goes in ahead of time, and which isn’t always evident in the ‘good times’, but whose impact becomes clear when it’s most needed.
The benefit of built-in ‘shock absorbers’
In today’s world where there’s more information available and more quickly than ever before, it can be easy to read about the latest moves in share markets and assume they directly translate to your investment portfolio. However, there are some key strategies that mean this often isn’t the case. These are the ‘shock absorbers’ that are often built into portfolios to help them deliver robust outcomes over time. The key examples include:
- Diversification across different asset classes – particularly holding some high-quality fixed interest investments. This means that over the first three months of 2020, investors in a Balanced portfolio have benefited from gains of about 1% on NZ and Global Fixed Interest investments, which have helped offset some of the weakness in share markets.
- Strategic Currency management. Being a small, open economy, our New Zealand Dollar tends to fall in value when markets are ‘stressed’, and this year has been no different. The NZ Dollar has fallen 13% against the US Dollar since the start of the year, helping support the value of overseas shares in NZ Dollar terms.
Governments and central banks ‘all in’
History consistently shows that investment markets ultimately recover from shocks – and often start this recovery process while the news headlines remain bleak. While the short term challenges are clear, it’s also clear that policymakers and central banks have ‘taken the gloves off‘ in providing liquidity and short-term support measures that seem to increase by the day. These measures are firmly aimed at helping to ease the burden and see businesses and economies through to the other side – acknowledging that some business casualties are inevitable along the way. From here what matters for portfolios is future return prospects, not the last few months. We expect our fund managers to focus on quality businesses and fixed interest investments putting client portfolios in good stead to weather this period, and ultimately will also show more areas of opportunity as the ‘light at the end of the tunnel’ inevitably becomes clear.
Amidst the wall-to-wall Coronavirus news coverage, the exchange rate between the New Zealand and Australian currencies quietly rose to almost $1. This is a good opportunity to lock in an attractive exchange rate for Australian share investments, as it is unlikely to see this NZD level as sustainable long term.
This information was provided by Booster.