After 102 days of no community transmission, New Zealand has joined much of the rest of the world in seeing a resurgence in Covid-19 cases, resulting in a swiftly announced lockdown of the Auckland region.
Lockdown comes with a sense of déjà vu, when this happened the first time around in March, financial markets responded with sharp falls in share prices and the NZ dollar. Should we expect more of the same if the current 3-day period at level 3 evolves into something more persistent?
We know that level 3 has a severe impact on Aucklanders daily lives. The impact on business is more incremental with ASB economists estimating the weekly impact to NZ GDP to be 0.2%. Small, but could accumulate should restrictions be extended.
Similarly, impact on businesses could be significant for a protracted set of restrictions. However, compared to March we expect the impact on share prices in New Zealand to be much more muted. This is in-line with share markets in other countries that have all but ignored resurgences in infections and renewed social restrictions. Why do we think this the case in for the NZ share market too?
Firstly, individual company share prices already reflect the backdrop. Those companies most impacted are seeing shares trading at prices well below the levels they were at in January. For example, Air New Zealand shares are trading at less than half the price they were at the start of the year. That does not make them cheap, but it reflects the fact that investors already expect their operations to be impaired for some time.
Secondly, companies are better capitalised (funded) with many having come to the share market to secure funds to tide them through an extended period of uncertainty. Through March and April we saw NZ companies raise around $2.5bn of equity capital. Although further raising can’t be ruled out, by and large we think companies have strong enough balance sheets to weather further stresses.
Thirdly, the government still has $14bn of unallocated budget funds and expectations are that they would likely step in to mitigate the impact of further lockdowns. Although government debt levels are rising, NZ’s financial position remains relatively strong and provides room for further funds to be raised if necessary.
Fourthly, the RBNZ remains extremely supportive of the economy, attempting to lower interest rates by any means necessary. Yesterday’s surprisingly large increase in their bond purchase program was illustrative of this and it is likely that we will see a negative official cash rate at some point next year. This continues to incentivise savers away from cash deposits and into other savings vehicles, ultimately providing some support for the share market.
Finally, the mix of companies in the NZ market means that the NZ50 index as a whole is not particularly exposed to the fortunes of the domestic economy. Fisher & Paykel Healthcare, A2 Milk, Spark and the utility companies are largely immune to the current situation in Auckland and represent the majority of the index.
That’s not to say there is nothing to do as investors. How the current situation evolves changes the outlook for a number of businesses, including the retirement sector, tourist related companies, retailers and property stocks. We will be watching for information on the severity and duration of this lockdown accordingly.