The COVID Diaries: New Zealand investor 1

The following interview is with a New Zealand-based fixed-income investor. It was conducted on 19 May 2020.

What do your working arrangements look like now New Zealand is in level two restrictions?

We have a small team, so we contemplated having a rotation of people going into the office. However, when we asked everyone whether they wanted to travel during level two lockdown, by and large people were still happier to stay at home.

Therefore, the bulk of the team is still working from home. There are some people for whom it makes sense to go into the office and they are welcome to do so, but I am well set up at home. My preference for the near term is certainly not to fly if it can be avoided. But once restrictions are eased to level one I will probably start travelling to work commitments again.

There seems to be a greater realisation of the ability to have a distributed workforce while still operating effectively.

In some ways it is easier to operate at home. Having external meetings usually dictates where I work, but these are all happening online now so it does not matter where I am. I think there is a preference among a lot of people for this to continue to some extent.

Are you looking forward to being able to have face-to-face meetings again?

I do miss having a chat with peers over a coffee. When working from home every conversation has a purpose. In my view good ideas can be born out of more general conversation.

But, to be honest, the news flow has been ferocious, especially earlier in the lockdown, and I’m required to be over a lot of material. Keeping on top of this takes up a lot of time and the ability to work efficiently as a team is really important. There is no choice but to let some things go and, to be frank, the coffees have to be the first thing to go. In this context not having to travel to the office has been helpful.

“As we face into a severe recession, unprecedented policy coordination has fuelled a liquidity rally globally, even with the outlook for real economies still very uncertain. To some we are back to where we were, but worse.”

How are you thinking about the evolving challenges associated with the crisis?

The news flow has calmed down a little bit now. Earlier on our focus was to stay on top of the policy responses – not just in New Zealand but globally – as well as navigating volatile markets and keeping clients abreast of developments. The speed of the policy response quickly repriced liquidity premia.

Now our focus has moved to understanding the tug of war between issuance and QE, and the implication for rates, curve shapes and credit. As purchases run ahead of issuance, domestic bond investor demand spills over to credit markets. Ultimately the Reserve Bank is touching everything here, making it challenging.

On the global front, we are particularly mindful of the Fed [US Federal Reserve] buying corporate bonds. If it steps back too soon it could become quite ugly.

I think it is fascinating to reflect on where we were before Christmas. We were noting the valuation gap in risk assets, underpinned by central bank policy. Now, as we face into a severe recession, unprecedented policy coordination has fuelled a liquidity rally globally, even with the outlook for real economies still very uncertain.

To some we are back to where we were, but worse. Despite significant uncertainty, and rising defaults, the market is largely priced for a recovery. Even more challenging will be understanding the path to exiting QE in the future.

In Australia last year the debate was around whether or not the RBA would bring in QE. Now we are in May and the reserve bank not implementing QE would be unimaginable.

It really is amazing. Central banks have stomped on any liquidity premia and crowded out investors. To achieve a reasonable yield you need to be resourced to identify mispricing of credit risk. Purely chasing down higher yields, to the extent you can find them, may come with higher default risk.

New Zealand is different to Australia though. Australia has lagged New Zealand in corporate spread compression, possibly because the corporate weight is a larger portion of the index relative to New Zealand. Though this has been diluted to some extent by recent high-grade semi-government issuance.

In New Zealand, the rally has been across the board, including lower-rated issuers and those more affected by COVID-19. Whether those issuers could come to the market anywhere near their secondary marks is debatable. Regardless, the lack of issuance is driving spreads tighter while the reserve bank is buying. Navigating a way through this is very challenging.

Are you more or less optimistic about the crisis than you were during the early acceleration period of moving to home working and adding social distancing measures?

I think it would be fair to say the speed of the deterioration in markets surprised everyone. The policy response and recovery in markets has been faster than I anticipated, and it looks like we are navigating the health crisis better than our global peers.

Negative bank rating actions were to be expected, but ironically the key supporting factor for the banking sector is the capital build over recent years. Capital gives us a buffer we would not have had in the past, which is good.

On the other hand, with rising debt levels and a depleted toolkit I’m now more concerned about the future, both in terms of stimulus should the recovery stall, in the event of a second wave, or down the track how we actually exit QE.

In the mean time, however, the policy commitment is what matters. There will likely be periods of volatility as we navigate the outlook for higher unemployment and uncover the impact to the real economy, but we shouldn’t revisit the substantial repricing of liquidity premia that we saw when the policy response was less certain.

What are you most looking forward to when New Zealand gets back to level one or having no restrictions?

Having a bit more headspace to contemplate what next and introducing a bit more variety into my day, whether that be through more exercise or just getting away from the desk. When we work from home, work life can quickly take over. Restoring some balance will be good. I expect we will be in this new world for a long time yet, though.

Workplaces will adapt and I don’t think people will be travelling even half as much as they used to. If you can point to a positive out of this, it is that everyone has been forced quickly work in a way that previously was unheard of, and discovered it’s possible to change and adapt.

I think it enables greater connectivity with people who previously by nature of their location may have been more difficult to connect with. I am looking forward to having conversations with a broader variety of people, which will help shape our view on things.

I do prefer the conversations where you can look someone in the eye and vice versa, but we can still get this through Microsoft Teams and Zoom. I think it will take a while to regain some balance but I have no doubt the future of work will change, and I think that’s quite exciting.

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