Sep 14, 2021
Grant Lowe

June Market Update

“It’s a mirage, basically. In terms of cryptocurrencies, generally, I can say almost with certainty that they will come to a bad ending.” - Warren Buffett


May 2021 was a tumultuous month for ‘investors and traders of cryptocurrencies, as Chinese authorities cracked down on Bitcoin trading (and mining) which sent prices of all crypto tumbling.

Bitcoin was one of the better performing cryptocurrencies, but still fell 17% on a single day in the month and at the time of writing was down 50% from its all-time high.

Bloomberg Crypto index
Bloomberg Crypto index (Source: Bloomberg,

The Chinese announcement banned Chinese financial institutions and payment companies from providing services relating to crypto transactions – although it stopped short of barring individuals from actually holding crypto. The announcement led to several of the largest crypto mining operators suspending their Chinese operations. This is a big deal for crypto coins as China accounts for up to 70% of the worlds crypto mining.

Adding to the woes of the sector, the US Federal Reserve Chair Jerome Powell also stated that cryptocurrencies pose risks to financial stability and indicated that increased regulation might be required. If you are wondering why authorities are looking to crack down on crypto this chart might help explain.

Cryptocurrency payments by type of recipient
Source: Chainalysis, The Daily Shot

What could possibly go wrong from a market that is favoured by criminals, and has variants such as ‘Dogecoin’ invented out of thin air one day as a joke and worth ‘billions’ the next?

NZ doing well?

Our domestic economy appears to be faring well at present, and one of the reasons is that we suffered a very small dip in GDP last year. In fact, our largest trading partner (China) managed to grow their economy over 6%, whilst our 2nd largest (Australia) fared similar to ourselves.

The following chart highlights how fortunate we were on the economic front in 2020.

GDP Growth by country - % for calendar year 2020
Source: Macrobond, ASB

However, there are a couple of things we in New Zealand need to keep an eye on. Firstly, according to the chart below, which shows the percentage households around the world are saving of their net current incomes, we appear to be among the worst savers in the developed world.

At least we aren’t in negative territory (as we were through the first part of this century), however this is not the type of measure we want to be last in. The chart below indicates we may not have much capacity to tolerate a sustained shock or recession.

Global Net Household Saving Rates Percentage
Source: OECD, Refinitiv, Financial Times

We have discussed inflation extensively in our recent commentaries however, it remains one of the key factors that is likely to shape markets going forward, with continued uncertainty around if the forecast spike in inflation later this year will be transitory or sustained higher inflation.

The latest inflation indicators from ANZ (based on the correlation with their Business Outlook pricing intentions survey) look sobering. There is a clear indication that companies are now likely to start passing on the inflationary pressures they are seeing in the manufacturing and shipping of goods both globally and locally.

NZ Business Pricing Intentions

When interest rates do begin to experience a meaningful rise, it will be interesting to see the impact on those who have become accustomed to the lowest mortgage rates we have ever seen in this country. As shown below house prices have historically been reasonably well correlated with interest rates.

As shown below, over 60% of all mortgage holders are currently choosing to be fixed for 12-months or less, meaning any change in interest rates will be felt by most borrowers almost immediately after they start to rise. We have also recently seen the NZ 5-year mortgage rates start to move higher, which is potentially a concerning indicator of things to come.

NZ Residential Mortgage Rates
Source: RBNZ, ANZ Research
NZ Mortgage fixed terms
Source: RBNZ, ANZ Research

NZ Mortgage rates vs. NZ House price index
Source: Westpac

Global Markets

It was a rather ‘topsy-turvy’ performance from financial markets through May. There was little overall change in US Equities, however they did experience a mid-month sell-off as a higher-than-expected annualised inflation figure of +4.2% was announced. This was largely shrugged off through the 2nd half of May, and US Equities edged their way higher.

The key question of when the US Federal Reserve might start ‘tapering’ back its Quantitative Easing (keeping the risk-free rate of return lower) continues to be debated. Below is a chart showing that the market expectation of when the US fed will start tapering was pulled forward with the majority of those polled suggesting we could see this as soon as the first half of 2022.

When will the Fed raise rates?

Source: Bloomberg Finance, Deutsche Bank Asset Allocation

This is important because Quantitative Easing comprises approximately half of the US$12 trillion stimulus injected into the US economy since early 2020. This stimulus has been the key driver for supercharged returns from shares and property as interest rates have fallen around the world.

Fiscal & Monetary Stimulus Feb 2020 – March 2021
Source: Cornerstone Macro Research, The Daily Shot

The impact to growth from Covid lockdowns

On the Covid front, we are seeing some significant 2nd and 3rd waves across parts of world, with Asia (ex-China) being amongst the worst affected. India has been receiving the most news, however even those countries that had previously done very well containing Covid (i.e., Taiwan) are now experiencing strict lockdowns as they struggle to keep a lid on the latest waves.

However, for financial markets these Covid outbreaks have been offset by the successful vaccination rollouts in major western nations. The United States has led the way, and as such Westpac has recently upgraded its growth forecasts for the largest economy in the world for an expected 6.5% growth in Gross Domestic Product (GDP) for 2021 and 4.1% growth in 2022. In 2023 and beyond economists are forecasting the US to return to slow and low growth meaning the high growth that we are seeing in 2021 and 2022 are simply an outcome of record stimulus, and an economy reopening after a year of rolling Covid-19 lockdowns.

Global GDP Growth Forecasts
Source: Westpac, Stats NZ, IMF
Source: Westpac, Stats NZ, IMF

As we should all be aware the US has demonstrated strong political disparity between Democrats and Republicans over the past few years. This has played out in views expressed around wearing a mask, and getting the Covid-19 vaccine, with Republicans demonstrating a high lack of trust in government and scientific recommendations.

As at the time of writing this commentary 164 million Americans, or 50% of the population has had at least one Covid vaccination shot. We are now seeing the number of US citizens turning out to get their first shot declining and the US government resorting to different approach to try and encourage people to come and get vaccinated.

One interesting strategy that a number of US States are undertaking are ‘vaccination lotteries. A 22-year-old from Ohio made headlines when she won that State’s US$1 million lottery that is open to all people who have had at least one shot of a coronavirus vaccine.

Not to be outdone, California has announced they would fund a US$116.5 million vaccine incentive programme intended to motivate their population to get a jab. Of this funding, US$100m is in the form of $50 prepaid cards for the next 2 million people who get vaccinated and $16.5m will be given out in cash prizes to some of those vaccinated Californians!

US Vaccination Cash Splurge


Global share markets had a reasonably volatile month through May, ending up around where they started the month. This was due to investors starting to focus on when the US Federal Reserve may start discussing tapering their Quantitative Easing Programme.

Investors in cryptocurrencies had a rude awakening, as regulators began to turn up the heat which has sent prices nosediving. We continue to watch this with a high level of interest (and scepticism) to see if this new investment vehicle proves to be a stable long-term investment. To date it appears to be one of the more volatile ways to invest.

Most importantly, the fear of sustained inflation, and consequences resulting from this scenario (chiefly higher interest rates/bond yields) continue to be the primary concern and focus of the markets. Global economies continue to forge ahead and produce strong GDP growth numbers – particularly those economies leading the charge on vaccinations. This is likely to result in strong earnings figures over the coming months – the key question for markets might be how much of this is already baked into prices?

We certainly continue to live in historically significant times. The investment markets both bonds and shares continue to trade in a tight range. Only time will tell how they receive any news about the end of the US QE programme. As has become common over the past 24-months we continue to recommend clients proceed with caution and have a solid understanding of what they are invested in and the potential upside and downside risk/return payoffs.

Private Wealth Advisers believes the information in this publication is correct, and it has reasonable grounds for any opinion or recommendation found within this publication on the date of this publication. However, no liability is accepted for any loss or damage incurred by any person as a result of any error in any information, opinion or recommendation in this publication. Nothing in this publication is, or should be taken as, an offer, invitation or recommendation to buy, sell or retain any investment in or make any deposit with any person. The information contained in this publication is general in nature. It may not be relevant to individual circumstances. Before making any investment, insurance or other financial decisions, you should consult a professional financial adviser. This publication is for the use of persons in New Zealand only.

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