The term ‘quantitative easing’ has been tossed around in the media recently, particularly in reference to the Covid-19 economic recovery.… But what does this actually mean?
Quantitative easing is a tool used by central banks, like our Reserve Bank, to encourage more investment in business growth and consumer household spending – with the aim being an overall boost to the economy.
This is done by creating or ‘printing’ new money and using it to buy certain assets – usually government bonds. This has the effect of pushing long-term interest rates down, increasing the amount of available money available in the economy.
What does this mean for everyday Kiwis?
For Kiwi businesses, low interest rates mean their cost of borrowing is cheaper which encourages them to invest in things like research and development, more work vans or more staff.
For consumers and households, low interest rates mean lower mortgage payments resulting in more disposable cash, while lower returns from savings accounts results in less money being deposited in the banks. The combined effect encourages consumers and households to spend on everyday goods and services, which in turn promotes economic growth.
This is how the Reserve Bank plans to use quantitative easing to help the NZ economy recover from the Covid-19 lockdown.
This strategy of using quantitative easing to stimulate the economy has been used by quite a few countries in recent years, with the UK, United States, Europe and Japan all having used the tool to some extent since the Global Financial Crisis 2008.
Quantitative easing represents a change of direction for the Reserve Bank. In the past, whenever there has been a need to give the economy a booster shot (no pun intended), their typical response would be to drop the Official Cash Rate (OCR) to influence the short-term interest rates. However, since the Reserve Bank has recently cut the OCR to new record lows of 0.25%, there is not a lot of room to move further, so it has had to look to other solutions.
Quantitative easing also has a significant effect on other financial assets. In response to lower interest rates on government bonds, investors look to other investment opportunities to seek higher levels of returns. This means that alternative investments such as shares provide an appealing option.
The graph on the right shows the value of the NZX 50 index, the main measure of the NZ share market performance over the first half of 2020. Since the announcement of the quantitative easing program (the green line), the NZ stock market has bounced back by over 24% and almost back to where it was when the year started (although still slightly below the pre-Covid highs).
While this highlights the impact that quantitative easing can have, it’s also a timely reminder of the importance of having a suitable long-term investment goal and sticking to it, even when times are tough. I think we can all agree that 2020 has been one heck of a year (and we’re only just past halfway!) and some investors may have been tempted to sell their investments at the wrong time.
We remind all our Booster members that KiwiSaver is a long-term game and the plan you have put in place with your financial adviser is purposefully constructed to ‘hold up’ relatively well during uncertain times and help you reach your financial goals.
What’s been happening in the markets in June?
Global share markets in June have continued to be as choppy as the Wellington Harbour in winter, while the rest of the world continues to grapple the Covid-19. While it looks like the bounce back from the March drop in the markets is continuing through June, we are far from being out of the woods yet with parts of the U.S. and Australia picking up in Covid-19 infection rates. Our team here at Booster remain focused on being adaptive during this fast-changing environment. We are pleased that our core diversified KiwiSaver funds have delivered moderate gains over the past 12 months, despite the recent volatility.
Booster’s NZ share market investments gained over 5% in June. Alongside the support that the Reserve Bank provided though ‘quantitative easing’, a large part of these returns was driven by Fisher & Paykel Healthcare which manufactures respiratory health care products and has seen massive demand in the wake of Covid-19.
Our active management strategy in our global shares investments also had a positive impact on global shares returns, in particular from the investments managed with California-based Fisher Investments. This included a wide range of large global companies that have done well throughout Covid-19, such as Chinese tech giant Tencent, Apple, Amazon, and Netherlands-based semiconductor manufacturer ASML.
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Booster KiwiSaver Scheme is managed and issued by Booster Investment Management Ltd. A copy of the Product Disclosure Statements are available at www.booster.co.nz. A disclosure statement is available from your financial adviser, on request and free of charge.
