When we reflect on the performance of global equity markets over the last 12 months, a picture really does tell a thousand words...
This chart highlights the cumulative performance of the S&P Global Broad Market Index1 (in USD) over the course of the tumultuous last 12 months. After falling over 30% during the first quarter when the initial wave of the global pandemic hit, the index then defied all expectations by, remarkably, closing out the year with a gain of +16.8%. From the low point on 23 March, this represented a global share market rebound of just over 73%!
Over the years, we have talked at length about our inability to predict the future. And, often in the same breath, we have stressed the merits of adopting evidence-based investment strategies where ‘forecasting the future’ is not a necessary component of the strategy’s ultimate success.
The difficulty with forecasting is laid bare when a year like 2020 comes along.
In January, almost no-one was predicting a deadly global pandemic. And yet, before the quarter was out, we were facing the unimaginable, and global shares had fallen in a heap. In late March, the world was struggling to come to terms with what had occurred. We were besieged by escalating Covid-19 infection rates, mounting deaths, border closures, country lock-downs and extreme economic uncertainty. In the midst of all of this, very few were predicting the extraordinary speed and strength of the market rebound that was soon to follow.
However, by the end of the year, even while second and third waves of the pandemic were battering the USA and Europe, and with a contested US presidential election where the sitting president was refusing to accept the results, global share markets were moving sharply back into positive territory.
The key difference now was that Covid-19 vaccines were beginning to be distributed in the northern hemisphere. And even though we still don’t know how the post-Covid world will look or function (particularly in relation to international travel and tourism), the faster-than-expected arrival of the vaccines provided the impetus to push share markets to new heights.
Figure 2 below summarises the key asset class returns in 2020 on a quarter by quarter basis, by highlighting the performance of a major market index in each asset class. All returns are gross of domestic tax and fees and are from a New Zealand investor’s perspective (i.e. in New Zealand dollars):
|Asset class||Index||Jan - Mar||Apr - Jun||Jul - Sep||Oct - Dec||12 mths|
|New Zealand shares||S&P/NZX 50 Index, (gross with imputation credits)||-14.5%||16.9%||2.9%||11.5%||14.6%|
|Australian shares||S&P/ASX 200 Index (total return)||-24.0%||20.8%||0.8%||12.5%||4.2%|
|MSCI World ex Australia Index (hedged to NZD)||-20.9%||18.2%||6.6%||11.7%||11.4%|
|MSCI World ex Australia Index||-10.6%||10.2%||5.4%||4.6%||8.6%|
|Emerging market shares||MSCI Emerging Markets Index (gross)||-13.8%||9.3%||7.0%||10.1%||11.0%|
|New Zealand property||S&P/NZX All Real Estate Index (gross with imputation)||-20.3%||6.8%||13.4%||8.7%||5.0%|
|International property||S&P Developed REIT Index (gross)||-19.2%||3.0%||0.2%||3.6%||-13.6%|
|New Zealand fixed interest||S&P/NZX A-Grade Corporate Bond Index||1.3%||3.4%||1.7%||-1.0%||5.4%|
|International fixed interest||FTSE World Government Bond Index 1-5 Years (hedged to NZD)||2.2%||0.6%||0.2%||0.2%||3.2%|
|New Zealand cash||NZ One-Month Bank Bills||0.2%||0.1%||0.1%||0.1%||0.4%|
In this most extraordinary year, it wasn’t interest rates, inflation, growth rates or profitability that were the main drivers of returns. It was confidence. In the first quarter, confidence quickly evaporated as we collectively began to fear for our lives and our livelihoods. However, as we gradually readjusted to the idea that we had the capacity to protect ourselves, and that governments everywhere were not going to stand idly by while their economies tanked, our fears slowly changed to hope and, finally, to optimism.
From the returns table we note that:
While the overall quarterly returns otherwise speak for themselves, we think there are a few other noteworthy takeaways from this highly unusual year:
|US unemployment||Frequency||S&P 500 annualised returns|
|7% - 9%||17%||16.9%|
|5% - 7%||45%||10.6%|
So . . . where to from here?
After what we all went through in 2020, it would be a truly brave (or foolhardy?) person who attempts to provide a detailed roadmap for the year ahead. Although the arrival of several Covid-19 vaccines gives us cause for renewed optimism, the list of reasons for investor uncertainty heading into 2021 remains frustratingly long.
For starters, we still have a global pandemic. We still have intermittent lockdowns, travel restrictions, volatile markets, and extreme political turbulence. We have considerable uncertainty over large parts of the economy and job sustainability. We also now have new record levels of government debt, and questions over how it will ever be repaid. In the meantime, we continue to have historically low interest rates and the likelihood is these will stay low for an extended period. It’s a sobering list. But before we get too despondent, we should remember that most of these issues, in one form or another, were also present in 2020 and, for the last nine months of that year, investors enjoyed great returns.
We don’t know what 2021 will bring, but we do know it will bring its own unique set of challenges. If 2020 taught us anything it was that, through no fault of our own, we can sometimes be in situations that we are uncertain how to handle. And when those situations have the potential to severely impact our investment or retirement plans, then we really need to be able to make the smartest decisions possible.
That’s where good advice and an evidence-based investment approach are so valuable. We know that markets are volatile, and we know that unexpected events will occasionally take us all by surprise. As a result, these “known unknowns” are factored into our long term planning.
Although the likelihood of experiencing an unexpected event means a wider range of short term investment outcomes are possible, these outcomes are not often going to be fatal to a sound long term plan. And it is this knowledge that greatly assists us not to panic when something unsavoury does occasionally hit the fan.
The idea that share prices can sometimes fall significantly and yet still manage to rebound is not new. In fact, on average, we expect share market returns to be negative once every three or four years. But we continue to allocate to shares because it’s in the share markets that we expect the bulk of our long term returns to be generated. It never stops being uncomfortable when share prices are falling but the best advice, even at those times, is to stick to your plan. For all long term investors who experienced the awful first quarter in 2020, the decision to stay invested was very likely their best investment decision of the year.
In a remarkable achievement by medical researchers, several Covid-19 vaccines displayed extremely positive trial results during the final quarter of 2020. These results were both sooner than expected, and with higher efficacy rates, which fuelled expectations of a quicker return to social and economic normality. In December, initial vaccines were approved for international distribution and the global inoculation against Covid-19 commenced.
This was very positive for markets, with expectations of an increase in near term economic output and revenues driving share prices higher almost across the board, even as a ‘second wave’ of Covid-19 was causing increasing infection and mortality rates around the world.
Overall returns through the quarter were generally positive for riskier assets, and many equity markets posted significant gains to close out an unforgettable year with solid returns. An outcome few of us would have dared dream of in late March.
The final quarter of 2020 started similar to the rest of the year, with high levels of uncertainty resulting in heightened volatility for risky assets.
It was largely anticipated that Joe Biden would prevail in the US presidential election yet a risk of a disorderly transition of power weighed on the economic outlook. This also led to delays in finalising US government support packages which stifled investor sentiment as October drew to a close.
The November election delivered a comfortable margin of victory (eventually) for Biden which was followed closely by positive vaccine news and the finalisation of US government support packages in late December. This triple dose of good news “Trumped” the incumbent’s claims of election fraud, driving very strong share market performance through November and December pushing all major developed markets equity indices to strongly positive returns for the quarter. The S&P 500 Index (total returns in USD) advanced +12.1% for the quarter closing out a remarkable +18.4% return for the year.
In Europe, share market performance was also very strong. This was largely due to the positive vaccine news, the approval of further recovery packages by the European Union, and the finalisation of the Brexit trade deal in late December. For the quarter, the MSCI Europe ex UK Index (in local currency) gained +10.2% dragging the 2020 return into the black at +2.1%.
The same themes drove the British FTSE 100 index up by +10.9% to close the year down -11.5% (in GBP terms). Japanese equities also participated in the rally with the MSCI Japan Index advancing +12.8% for the quarter to lift its annual return back into the positives.
The New Zealand dollar was generally strong versus foreign currencies and this meant that hedged foreign assets outperformed. In New Zealand dollar terms, the MSCI World ex Australia Index delivered a quarterly return of +11.7% on a hedged basis and +4.6% unhedged. For the complete 2020 calendar year the New Zealand dollar hedged index ended up +11.4% and the unhedged index up +8.6%.
Source: MSCI World ex-Australia Index (net div.)
Emerging market equities generated their strongest quarterly return in over a decade, with Korea and Brazil both notable outperformers. Conversely, Egypt, where new daily Covid-19 cases accelerated, posted the lone negative return across the entire emerging markets region. Overall, the MSCI Emerging Markets Index (gross return in USD) advanced +19.8% over the quarter to return +18.7% for the year.
Positive vaccine news lifted hopes for a global economic recovery in 2021. This helped bolster commodity prices which was generally very supportive for emerging market net exporters. US dollar weakness during the quarter was also a positive, as the debt servicing burden for many emerging market nations holding USD denominated debts was reduced.
Regional heavyweight, China, produced a solid positive return for the quarter but lagged the regional average. The launch of an anti-trust investigation into Alibaba and a further escalation in US-China tensions both dragged on sentiment.
In unhedged New Zealand dollar terms, the MSCI Emerging Markets Index produced a quarterly return of +10.1%, for a +11.0% calendar year return.
Source: MSCI Emerging Markets Index (gross div.)
The New Zealand stock exchange rode the fourth quarter surge in global equity markets by delivering an excellent +11.5% over the quarter as the local index posted a +14.6% gain for the year; a result scarcely believable nine months earlier.
During December, New Zealand’s GDP for the third quarter of the year was released. The reported growth rate of +14.0% represented the largest quarterly rise in growth on record, confirming the strong recovery of the domestic economy post Covid-19 lockdowns. This strong economic performance was reflected in domestic business confidence, with the ANZ business survey indicating a very positive outlook for profit expansion and investment intentions in the year ahead.
This improving sentiment, added to a growing sense that a ‘return to normality’ might be possible some time in 2021, saw a number local firm’s share prices jump appreciably in the final quarter of the year.
Notable firms amongst the better performers during the quarter were Fletcher Building (+53.2%), Mainfreight (+51.7%) and Meridian Energy (+49.9%), with all firms generally citing improving trading conditions and profitability expectations.
Towards the other end of the spectrum, in mid-December the a2 Milk Company announced a downward revision to their August guidance, now stating that their full 2021 financial year revenue was forecast to be $350m to $500m lower than previously advised. This resulted in a swift -22.1% daily price decline on 18 December and led the firm to significantly underperform the overall market, posting a -21.3% return for the fourth quarter and a disappointing -19.6% for the full year.
Source: S&P/NZX 50 Index (gross with imputation credits)
Australian share market returns were very strong and remarkably evenly dispersed over the quarter. The large capitalization S&P/ASX 100 returned +13.78% in Australian dollar terms, while the small capitalization S&P/ASX Small Ordinaries Index delivered +13.83%. Although, over the full year, the small outperformed large by a sizable 8.41%.
Commodity prices generally experienced a resurgence in the final quarter of 2020, and this was very positive for materials and resources companies in iron ore. Chinese economic stimulus to combat Covid-19 impacts, coinciding with an interruption in Brazilian supply, drove the iron ore price up 27.5% in the last three months of the year. While this helped Rio Tinto and BHP advance 20.7% and 19.2% respectively for the quarter, Fortescue Metals delivered by far the greatest gains in the sector, up 43.7% for the quarter and 151.0% for the year.
In a quarter of strong returns across a range of sectors, some of the previous sector laggards – namely financials, real estate and energy - finally found some strong support. Information technology, the sector that appeared to benefit most from Covid-19, also finished the year strongly and, for the full 12 months, delivered more than triple the return of the next best performing Australian market sector.
Returns to unhedged New Zealand investors were slightly reduced by a small appreciation in the New Zealand dollar over the quarter.
Source: S&P/ASX 200 Index (total return)
Government bond yields diverged quite markedly during the quarter.
The US 10-year yield was 0.23% higher, ending the year at 0.91%. Investors appeared to be buoyed by the curtain closing on an erratic Trump administration and looking forward to a fresh start - and the prospect of a significant new spending program – under President-elect Biden.
German yields were flat while Italian and Spanish 10-year yields saw declines as the European Central Bank increased quantitative easing. Across the English Channel, the UK 10-year yield was little changed as growing vaccine optimism was tempered by Brexit uncertainty (i.e. what the trade deal really means for the UK) and new lockdown measures.
Corporate bonds also enjoyed a good quarter, generally outperforming government bonds, with both investment grade and lower credit quality bonds delivering strong positive total returns.
The FTSE World Government Bond Index 1-5 Years (hedged to NZD) posted a +0.2% gain to take its 12-month return to +3.2%, while the broader Bloomberg Barclays Global Aggregate Bond Index (hedged to NZD) returned +0.8% for the quarter for a +5.4% return in 2020.
Source: FTSE World Government Bond Index 1-5 Years (hedged to NZD)
Domestic bond returns were the only negative asset class over the fourth quarter as stronger economic data and improving investor sentiment brought an abrupt end to the trend of falling interest rates.
The sharpest rise in yields occurred in November driven by a combination of factors. New Zealand economic data had mostly been outperforming expectations, with sectors such as housing, employment, and exports all surprisingly robust. However, this had largely been ignored until the news of viable Covid-19 vaccines hit global headlines in October and November. Further upward pressure was added with the government’s renewed focus on house price inflation and a ‘walking-back’ in the rate cut rhetoric from the Reserve Bank at their November meeting, which resulted in a jump in domestic yields.
By the end of the quarter, the 10-year New Zealand government bond yield finished 0.49% higher at 1.02%. It was a poor month overall for domestic fixed interest strategies.
Although credit securities generally outperformed government bonds, the rise in local bond yields was negative for bond prices and resulted in a -1.0% return for the S&P/NZX A-Grade Corporate Bond Index over the quarter, although the full year return was still a healthy +5.4%. The longer duration, but higher quality S&P/NZX NZ Government Bond Index declined -2.8% for the quarter while also delivering +5.4% for the year.
Source: S&P/NZX A Grade Corporate Bond Index
|Asset class||Index name||3 months||1 year||3 years||5 years||10 years|
|New Zealand shares||S&P/NZX 50 Index, (gross with imputation credits)||+11.5%||+14.6%||+17.0%||+16.8%||+16.1%|
|Australian shares||S&P/ASX 200 Index (total return)||+12.5%||+4.2%||+5.8%||+8.9%||+5.7%|
|International shares||MSCI World ex Australia Index (net div., hedged to NZD)||+11.7%||+11.4%||+9.4%||+11.8%||+11.8%|
|International shares||MSCI World ex Australia Index (net div.)||+4.6%||+8.6%||+10.1%||+11.1%||+10.9%|
|Emerging markets shares||MSCI Emerging Markets Index (gross div.)||+10.1%||+11.0%||+6.0%||+12.1%||+4.8%|
|New Zealand fixed interest||S&P/NZX A-Grade Corporate Bond Index||-1.0%||+5.4%||+5.0%||+5.0%||+5.6%|
|International fixed interest||FTSE World Government Bond Index 1-5 Years (hedged to NZD)||+0.2%||+3.2%||+2.8%||+2.8%||+3.6%|
|New Zealand cash||New Zealand One-Month Bank Bill Yields Index||+0.1%||+0.4%||+1.3%||+1.6%||+2.3%|
Unless otherwise specified, all returns are expressed in NZD. We assume Australian shares and emerging market shares are invested on an unhedged basis, and therefore returns from these asset classes are susceptible to movement in the value of the NZD. Index returns are before all costs and tax. Returns are annualised for time periods greater than one year.
Investors too often extrapolate the future based on their recent experiences.
In March 2020, who but the most rampant optimist would have dreamt, in the midst of the swiftest negative correction in sharemarket history, that most global sharemarkets would recover to deliver positive returns by year’s end? Yet this is precisely what happened. The optimists triumphed. It was such a remarkable outcome that it brought to mind the timeless research of noted economist Elroy Dimson.
Very few historians of finance have reached the heights of Professor Dimson. He is the Emeritus Professor of Finance at London Business School and his work has been cited over 10,000 times in academic articles.
He has written and edited books such as “Financial Market History: Reflections on the Past for Investors Today” and the “Global Investment Returns Yearbook 2020”, but he is perhaps best known for a book first published nearly 20 years ago, the boldly titled, “Triumph of the Optimists: 101 Years of Global Investment Returns.”
American philosopher Don Marquis once dryly observed, “an optimist is someone who never had much experience”. Well, Don Marquis never met Elroy Dimson.
In Triumph of the Optimists, Professor Dimson drew on the collective investment experience of over 100 years of financial market returns from 16 different countries, and in every case he and his co-authors found the same result, shares have higher returns than bonds and cash, often substantially higher.
In his findings at the time, he wrote, “In the United Kingdom, equities provided an annualised return of 10.1%, or 5.8% after adjusting for inflation. The best performing equity market was Sweden, with a real return of 7.6% per year, while the worst was Belgium, with an annual real return of 2.5%.”
Below we show the full chart of results detailed in Dimson’s book. Although they are, admittedly, about 20 years old, the broad findings continue to remain very relevant today.
Despite a year of uncertainty and upheaval, 2020 has ultimately been a triumphant year for the optimistic investor.
When the NZX lost about 30% in 30 days in late March, the news headlines were dominated by pessimism. Many businesses faced the prospect of closing down for an unknown period of time. The logic seemed painfully obvious. No customers means no profit, and no profit means businesses were going to either suffer or fail altogether. At the time you couldn’t blame someone for thinking that continuing to own shares in such an environment was not a good idea.
But since the markets hit their low in March, from that point to the end of December 2020, the NZX 50 Index (total return) has been up by over 54%.
We know that investing in shares holds a certain level of risk. This year has proven it so. Professor Dimson has a wonderful quote about risk that is based on his extensive research into the history of financial markets.
“Risk,” he says, “means more things can happen than will happen. It is not standard deviation. It is not variability. It is this sense that future events are highly variable and unknowable that gives us the best sense for risk.”
A global pandemic is an example of something that ‘could’ happen. And there are many other things that too could happen. But as share prices represent the best guess we have of the future value of a firm, and because future events are highly unknowable, shares are inherently risky.
However, over 100 years of financial history tells us that while anything can happen, and sometimes does, the value of businesses which can nimbly adapt to the environment of the day, will have the best opportunity to grow and to thrive over time.
That may not be the case every year, but over time horizons spanning decades (similar to the time horizon of most investors) it almost certainly will be. As for investors that do not have that long term time horizon or don’t like the market rollercoaster, holding other assets in combination with shares may be more prudent.
Like you, we are happy to see 2020 in the rear-view mirror. But hopefully this experience has done for each of us what Professor Dimson discovered in his research, that optimists can truly triumph.
This table shows each asset class in our portfolios and their returns over the past 20 years, as well as the returns of a 50/50 portfolio. There is no discernible pattern in the results from year to year. This makes it exceptionally challenging to pick in advance, the highest performing asset class each year. To achieve more consistent results, we invest in multiple asset classes. This ensures our portfolios always have some exposure to the highest returning sectors, whilst never being at risk of only being allocated to the lowest returning sectors. This is known as prudent diversification.
To see a larger version, click on the image.
In 2020 we were privileged to support Tāwhiri, the team behind the New Zealand Festival of the Arts, as their inaugural Patron Partner and to experience two triumphant Arts Festivals up close.
Despite the brewing pandemic, last March the NZ Festival of the Arts was enjoyed by more than 150,000 people over 200 events, including almost 100 free experiences throughout Wellington. The Festival featured three guest curators, an extended Access and Inclusion programme, a raft of SchoolFest opportunities and the new Porirua-based festival of youth Te Ata.
Postponed from June to November, the 2020 Wellington Jazz Festival was a valuable opportunity to highlight the talents of our Aotearoa artists, including commissioning four local musicians to compose and perform brand new music. With more than 10,000 people gathering at over 120 events, the Jazz Festival demonstrated the continued power of collective experiences.
The team is now busy on the next Wellington Jazz Festival, which will take place from 9 -13 June 2021, as well as developing the 2022 New Zealand Festival of the Arts.
As Tāwhiri’s Patron partner, our hope is to help facilitate culture and creativity spanning all art forms. We want to empower the Festival to continue to present great art in an accessible way. We welcome discussions on how you might join us in supporting the Festival.
We are proud to be the inaugural Patron Partner of Aotearoa’s biggest champion of cutting-edge arts and culture - New Zealand Festival of the Arts. We hope that you will join us in supporting them. Find out more about our Patron Partnership.
Our support for Gillies McIndoe Research Institute (GMRI) continues. They have recently announced positive interim results from their phase two clinical trials of an innovative new treatment for an aggressive brain cancer, glioblastoma. Results from the trial have shown that this medicine could extend the life expectancy of cancer patients quite significantly.
Gillies McIndoe is a Wellington based research institute who specialize in developing treatments of cancer without surgery, radiotherapy and chemotherapy. The company pioneers an innovative field of cellular and molecular research that may radically change the traditional understanding of disfiguring and life-threatening conditions.
Gillies McIndoe’s interim results from the clinical trial have recently been verified by the Independent Data Monitoring Board which overseas their research. They are now ready to do further trials on a treatment for patients who have failed conventional cancer treatments and for whom no further conventional treatment options are available.
Bloomsbury Associates continues to work with Gillies McIndoe as they seek funding for the next phase that treats patients at an earlier stage in the disease. We congratulate them on this latest result.
If you are interested to know more about the Gillies McIndoe Research Institute’s cutting edge work, join Dr Tan and the new Chief Scientist Dr Sean Hall at their information fundraising morning tea on Thursday 25th February at Seatoun Bowling Club, 16 Dundas St, Seatoun. Tickets are $35 per head. Register here.
GMRI is undertaking pioneering cancer stem cell research that has the potential to revolutionise cancer treatment. We think that this sort of transformational endeavour is worth supporting. Help us to help this unique research facility achieve its aim of making non-invasive and affordable cancer treatment a reality.
Last month, we were thrilled to be able to facilitate a $1 million donation from a Bloomsbury Associates client, Wellington-based property developer and philanthropist Mark Dunajtschik, to Hohepa Homes Trust. Mr Dunajtschik’s generosity will allow Hohepa Trust to build an additional care facility for intellectually disabled young people on the Kapiti Coast.
The Hohepa Trust is a Registered Charity providing intellectual disability services based on the principles of Rudolf Steiner. Their purpose is to establish and maintain homes, schools, organic farms and day services throughout New Zealand for the care, support and education of intellectually disabled young people and adults.
This is the second time we have assisted Mr Dunajtschik with a donation to Hohepa trust. In 2017, his support enabled Hohepa to build a new care facility on the Kapiti Coast. This latest contribution will add another 1.7 hectares to Hohepa’s existing footprint and help them to grow and provide important care for so many more people in the Wellington community.
On behalf of Bloomsbury Associates we’d like to thank Mr Dunajtschik for his significant generosity and on-going work with us.
Please feel free to pass this update on to friends and colleagues who may enjoy it...
If you would like to talk about anything discussed in these articles further, please feel free to call or email.
Phone: +64 4 499 6979
This document has been provided for general information purposes only.
The information in this brochure does not constitute personalised financial advice for any person nor does it constitute advice of a legal, tax, accounting or other nature to any persons. Recipients should seek professional advice before taking any action.
This brochure is based on information obtained from sources believed to be reliable and accurate at the time of preparation, but its accuracy and completeness is not guaranteed.
Any information, analysis or views contained herein reflect our opinion at the date of publication and are subject to change without notice.
None of Bloomsbury Associates Limited ("BAL"), its directors, officers, employees, agents or associates accept any liability whatsoever for any errors or omissions; or for any direct or indirect loss or damage of any kind arising out of the use of, or reliance on, the information provided in this brochure.
Past performance is not indicative of future results, and no representation or warranty, express or implied, is made regarding future performance. Investments are volatile and may fluctuate in that values can go down as well as up and investors may get back less than originally invested.
None of BAL, its directors, officers, employees, agents, associates or any other person guarantees the securities referred to in this brochure or the performance of those securities.
BAL, its directors, officers, employees, agents and associates may hold securities mentioned in this brochure (or related securities) as principal for their own account.
This brochure may only be distributed to investors in New Zealand and other jurisdictions to whom, under relevant law, this brochure may be lawfully distributed.
A disclosure statement is available, on request and free of charge from Bloomsbury Associates by emailing firstname.lastname@example.org or by calling +64 4 499 6979.