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Market Commentary - March 2021

The first quarter of 2021 followed 2020 at both a social level (US election controversy, more Covid lockdowns, royal family dramas, the list goes on), and a share market level, with volatility reigning supreme.

Unfortunately, the returns in this quarter have not followed those in the latter part of 2020, with the NZX50 underperforming its global counterparts, currently down 6.35% for the year. For context, the ASX200 is up 1.93%, the S&P500, up 3.8%, and the FTSE100
is up 4.1%.

There is a tendency to look for a specific reason for this underperformance, but inevitably there are always many factors pushing markets. The NZX50 has suffered due to poor performance from a few of the exchange’s larger players, namely Fisher & Paykel (who are coming off highs due, in part, to the Covid vaccine rollout), a2 Milk (covid again, this time impacting their supply chain), and Meridian/Contact (who have become play things of the US Clean/Sustainable Energy Exchange Traded Funds).

The other, broader factor is that the NZ market is very heavy in terms of dividend paying stocks. These have become increasingly popular for both local and international investors hunting for income in a low interest rate environment. The NZX50 has been one of the top performing share markets globally in the last 10 years, in part due to the tail wind from perpetually dropping interest rates.

Long term interest rates bottomed out in NZ at the end of September last year and have steadily climbed since then (the NZ market slightly underperformed in the December quarter as these rates rose as well).

5-year Swap Rate from 2011 to 2021

This has potential to be a headwind for the NZ market going forward.

Of course, we do not expect interest rates to increase materially for some time (the Reserve Bank have made that clear) so still see good value in the NZ market (contact your adviser for specific recommendations). However, we believe this underlying theme of rising rates (even if just slightly) increases the need for global exposure.

Global exposure has become an increasingly larger part of our strategy for managed clients. We believe it is essential to include global exposure for diversification reasons, as well as the for the greater scope of sectors and companies available.

We have outlined one option for global exposure later in this newsletter. Please contact your adviser if you would like to discuss whether these are suitable for your portfolio.

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