Investment Outlook November 2020 Refusing to be Average NZ Equities Australian Equities Global Equities BUY A2 Milk, BUY Amcor, BUY Abbott, Kathmandu, Mainfreight Cleanaway, CSL, Ramsay Laboratories, AstraZeneca, Stride Property, Spark Healthcare, Worley Schneider Electric, Siemens Investment Outlook November 2020 Jarden Overview November 2020 As the end of 2020 draws near, we look back on a year that has truly been “anything but ordinary”. In New Zealand, the Labour Party achieved a staggering election victory which will allow them to govern alone. Remaining with politics the US presidential election is just around the corner on Tuesday 3 November. It has the potential to deliver a notable change in the direction of US policy and the economy. In the short term, we are entering a period where financial markets could swing in either direction. After making solid improvement, the global economy is entering a period where the rate of recovery is slowing as governments support measures start being reduced. In addition, a new wave of Covid-19 infections engulfs many countries. However, central banks globally continue to do whatever it takes. This has resulted in extraordinarily low interest rates almost everywhere. In New Zealand, interest rates are expected to fall further and remain low for some time until employment improves, and inflation ignites. A direct consequence of low interest rates is asset price inflation, including equities and property. Meanwhile investors are firmly focused on the development of a Covid-19 vaccine resulting in attention starting to shift from those equities which have benefited from the Covid-19 pandemic, to those which are likely to benefit from the development of a vaccine. We observe that many governments have taken the pandemic as an opportunity to reset the direction of their economies. For most this will be a green-led recovery. In this edition we explore this theme by examining what it means for transport, infrastructure, energy transition, energy efficiency and the circular economy. At Jarden we have continued our expansion into Australia rounding out the team with several highly respected research analyst appointments. Through our “Save the Kiwi Day” we raised over $330,000 for the important work Kiwis for Kiwi’s to improve the survival rate of New Zealand’s national icon. Our geographic footprint has expanded with the opening of a representative office in Timaru and we welcome Tony Conroy to our adviser team in Dunedin. We have explored Jarden’s roots by telling the story of Ron Jarden and the firm he founded nearly sixty years ago. We have done this through the production of a short video which will appear in numerous media outlets and can also be viewed on our website at www.jarden.co.nz/about-jarden. History shows that the Jarden family refused to be average. Consequently, Ron Jarden was anything but ordinary and the firm, of which you are a valued client, operates in the same vein. As this is the last edition of the Investment Outlook for 2020, we would like to take this opportunity to thank you for your ongoing support and wish you all the best for the coming festive season. John Norling, Director, Head of Wealth Research Jarden Securities Limited | NZX Firm | www.jarden.co.nz 2 Investment Outlook November 2020 Contents Anything but Ordinary ............................................................................................................................................................. 4 Asset Allocation .......................................................................................................................................................................... 8 Company CEO – Adrian Littlewood, Auckland Airport ....................................................................................... 13 Jarden Wealth Management – Introducing Janine Turner .............................................................................. 15 Covid-19 Vaccine - A Financial Shot in the Arm ..…................................................................................................. 16 A Green-led Recovery ………..………………..…………………………...………………………………………………………………..……………….……………. 18 Quality Investing – Timing Isn’t Everything ………………………………………………………..…………………………………….…………….. 22 New Zealand Equity Metrics .............................................................................................................................................. 26 Australian Equity Metrics ...................................................................................................................................................... 27 Global Equity Metrics ............................................................................................................................................................. 28 Debt Securities – Implications of Low Interest Rates ...………................................................................................. 29 New Zealand Dollar – Holdings its Own ....................................................................................................................... 31 Staying the Course – Asset Allocation .......................................................................................................................... 32 Jarden in the Community – Save the Kiwi Day .…………….......................................................................................... 34 Important Operational Changes .….……………………….......................................................................................................... 35 Calendar ........................................................................................................................................................................................ 37 Your Local Jarden Team ...................................................................................................................................................... 38 Jarden Securities Limited | NZX Firm | www.jarden.co.nz 3 Investment Outlook November 2020 Anything but Ordinary Key Takeaways Before we look into the future, we acknowledge that while 2020 started as just another year, it has proven to be anything but ordinary. • The US election should prove to be Elections 2020 more exciting than the NZ election The New Zealand election saw the Labour Party returned to power with an enhanced majority • Covid-19 remains a (64 out of 120 seats) which allows it to govern alone. Based on the Prime Minister’s comment material risk as that “we will be a party that governs for every New Zealander”, we expect that there will not be numerous countries any extreme policies implemented, with Labour being focused on retaining power in the experience a second 2023 election. Labour’s five-point plan includes: wave of infections • There are high 1. Investing in New Zealand’s people though income support and access to training. expectations of 2. Increasing jobs by supporting industries and rolling out infrastructure investment developing an around the country. effective Covid-19 3. To future proof the economy, with a focus on a more sustainable economy, vaccine including clean energy projects such as the Lake Onslow pumped hydro storage. • Governments and central banks 4. Supporting small businesses, entrepreneurs, and job creators. appear to be taking 5. New Zealand is a trading nation. Consequently, there is a focus on the primary a “whatever it takes” sector, supporting exporters and negotiating free trade agreements with the United stance to support Kingdom and European Union. economies Two other points worth noting are an undertaking to only spend the remaining $16 billion (5% gross domestic product – GDP) in the Covid-19 Response Recovery Fund contingency if it is necessary, and to introduce a tax rate of 39% on personal income earned in excess of $180,000. No discernible reaction There was no discernible reaction by financial markets to the election result. by financial markets to the New Zealand The US election has greater excitement potential. The most likely outcome is that Joe Biden election result wins the presidency, and the Democrats retain The House and regain The Senate (a Democratic sweep). However, the structure of the US electoral system leaves plenty of room for uncertainty. A Democratic sweep would likely bring in the following changes: 1. Increased Government spending. While the details are unclear it is thought that extra spending could boost economic growth by 1% and result in higher inflation. 2. An increase in the corporate tax rate to 28%, a doubling of Global Intangible Low- Taxed Income tax, a 15% minimum tax on book income and higher Social Security payroll tax, are in aggregate expected to reduce US corporate earnings by 8%. 3. A more conciliatory foreign policy. The Democrat and Republican parties are both expected to take a strong pro-US stance in response to China. However, if the Democrats gain power it is expected some tariffs may get rolled back and a less confrontational stance to be taken against its traditional friends. A democrat sweep In aggregate, these policies might reduce US corporate earnings by 2-6%. This contrasts with might reduce US a victory by Donald Trump where his policies are expected in aggregate to provide a small corporate earnings by amount of upside to US corporate earnings. 2-6%. An analysis of past elections shows that while politics matter, 78% of the equity markets investment return at election time is driven by how the economy is performing, financial conditions, and equity