Tony Alexander Update June 2020

As at the time of writing on May 28, things seem to be moving in the right direction to have the country move out of Level 2 well before the end of June. And going by Australia having essentially the same infection and fatality rates as New Zealand, but without so tight a lockdown, it might not have been necessary for ourselves to go into Level 4 late in March.

But hindsight is a wonderful thing, and in terms of showing compassion and trying to do right by as many people as possible, the government has done a good job. But now we are entering the more challenging period in some regards. Many businesses have closed or laid off staff, and many more will follow.

Our economy is estimated by Treasury to be on the way to shrinking by near 1.0% in the year to mid2021 having shrunk near 4.5% in the year to June 2020 ending in 4-5 weeks time. After that a strong rebound of 8.5% is expected to mid-2022 then 4.5% after that. While many other forecasters have got worse numbers (and different annual time periods), so far, we seem to be doing better than the best scenario put forward by Treasury in their Budget documents of May 14.

An early exit from Level 2 will be of immense benefit to the hospitality sector, cinemas, events organisers and so on. Of benefit also would be the opening of a trans-Tasman bubble before the July school holidays. And on top of that work is underway not just to let in more movie-makers as has already happened, but to perhaps bring in some foreign students ahead of international borders opening up.

This highlights perhaps one of the most unique aspects of this deep recession we are currently going through. In the past, whenever we have had a recession in New Zealand, most of us have spoken in terms of the future being bad and that we would like to leave the country. We would talk about a brain drain and the loss of our valuable young people to other economies.

This time around not a single person has said that we are fundamentally doomed and that our population will soon be shrinking. Instead we are speaking about the rush of enquiries from Kiwi’s offshore in the real estate market, and expectations that once the borders open up a lot of people will be wanting to migrate here.

Our attitude toward this recession is different from the past, and while some of the numbers are very bad, there is more a glass half-full sentiment in play than the traditional glass half-empty. Many people – businesses and consumers – will be looking beyond this period of weakness as they get through it, and concentrating on the better times ahead.

That this is happening should not really come as a surprise to anyone who follows the sharemarket. After falling 37% and bottoming out late in March, we now have the likes of the Dow Jones Index down only some 14% from its February peak. Our own market some weeks back recovered to levels comfortably higher than the same period a year earlier.

Attitudes matter because they drive decisions. Once we get through the most intense period of business closures, rationalisation, and redundancies, there may be more positioning for the future undertaken than we have seen in any previous recession. This matters a lot when we focus our attention on the likes of not just sharemarkets, but commercial and residential property markets.

We know that for the next few months there will be weakness in both broadly-defined sectors. House price declines are likely everywhere, with some big falls likely in Queenstown and Auckland’s inner-city apartment market. Commercial property prices are also likely to decline, mainly for hospitality, retail, tourism, and CBD offices. But there is good underlying growth that is likely to sustain the industrial, farming, and warehouse sectors.

But astute investors will note that there are some extraordinarily large factors which will limit the extent of weakness in residential and commercial property markets, and perhaps the window of opportunity for making some very good purchases will be a lot shorter than many in the media would have us believe.

First, interest rates are low and headed lower, with some significant jawboning by the Reserve Bank Governor. Faced with the lowest rates of return on low risk assets like bonds and term deposits that they have ever seen, every day will niggle away at investors, encouraging them to search for better yields elsewhere.

Second, contributing to this interest rates effect will be the printing of money. This is something new for New Zealand so perhaps people here are not aware of what happened in other economies which did this post-GFC. While some of the money went into consumption and capital expenditure, most went nowhere, and some went into asset markets and pushed up the prices of shares and properties – both residential and commercial.

Third, the government has initiated a huge spending splurge and given themselves an extra $20bn beyond Budget day to spend. With a general election in September and polls likely to soon show some easing of the virus-driven surge in support for the government, we can count on almost all of that money being allocated in the next three months. In truth, the economy probably does not need extra stimulus and it would be better to focus a lot more on the leap in government debt. But with a centre-left government in power comprising a Cabinet with minimal business experience, spending is likely to be embraced with a vengeance.

Finally, there is a good chance that both business and consumer confidence levels will strongly recover before the end of the year, in spite of rising unemployment. This does not mean the outlook is good for retailers. But it does mean businesses will be making extra effort to limit the extent to which they downsize, if they believe 2021 will be a year of good recovery.

What this adds up to is the following. Our economy has passed its weakest period, which was during the lockdown. There are many job losses yet to be announced, and businesses would be advised to play things cautiously, watch debt levels, slash expenses, and not try to pick when the upturn in their sector will come along.

But to use a tramping analogy, even if you are dog tired, wet and miserable, and short of food, if you know you are on the right track and that the road end is just 5 kms away, you’ll push through the misery and tramp on. That is what our economy and its participants will be doing for the rest of the year – pushing through the misery, yet focussed on the better conditions which increasingly look likely early in 2021, and for some sectors even well before the end of the year.

This is why asset price weakness is likely to be substantially less than many might be thinking, and opportunities for low-priced purchases short-lived in duration.

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By Tony Alexander

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