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Case Study

What might Level 3 (or worse) mean for your KiwiSaver account

The re-emergence of Covid-19 in New Zealand can lead to many scary thoughts. Back in March, we saw markets fall by c.30% at the fastest pace in history as investors…

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13 August 2020

The re-emergence of Covid-19 in New Zealand can lead to many scary thoughts. Back in March, we saw markets fall by c.30% at the fastest pace in history as investors around the world tried to understand exactly what lockdowns would mean for global economies and listed companies. Now we are potentially heading back into lockdown we want to ease some of your KiwiSaver fears.


To help you through this tough period, we've given you the answers to 4 basic questions.

What will be the economic impact of a lockdown?

Any lockdown is likely to have a serious impact on the New Zealand economy. The hospitality, retail and tourism sectors will need to effectively shut down again, which will drag a huge amount of money out of our economy. This will cause consumer and confidence to fall which will cause people to save cash and stop spending where possible. This is happening just when confidence was starting to return and businesses were back on track after the previous lockdown.

The big fear is that a number of small businesses find that they can’t withstand a second lockdown period and now need to throw in the towel. This will lead to higher unemployment and potentially issues with landlords as tenants are no longer going to be able to pay their rent. 

Economic reports released on 12 August show that a lockdown could cost New Zealand up to $1.6b per week in lost output. This means less money to pay wages and fewer jobs. We do firmly believe that if Level 3 is extended, there will need to be further government support packages for workers and companies.

What will be the impact on the markets?

We don't think this resurgence will have an impact on the New Zealand share market. So far the NZX is down only 1% from when the announcement came through.

Internationally we have seen that further lockdowns or resurgences have not really caused a significant impact.  The ASX is in positive territory for the past month despite an extremely strict lockdown in Victoria and a seemingly worsening situation in New South Wales. The US market continues to go from strength to strength despite a continuous rolling of second wave infections.

In New Zealand, less than 10% of the NZX50 is made up of companies in the tourism, retail or hospitality sectors and in particular, our two biggest companies (A2 Milk and Fisher & Paykel Healthcare) make up almost 30% of the index. The global situation will be far more important to these large companies than the domestic situation.

And of course, there is always the Reserve Bank of New Zealand who is doing its best to support markets and the financial system through this period. On 12 August, the RBNZ announced that they would extend their Quantitative Easing (bond repurchasing program) from $60b up to $100b and are actively considering negative interest rates. This will keep interest rates lower for longer which will continue to push people into stocks.

International markets are sitting on a knife-edge at the moment; on 12 August the US market returned to its previous peak as a result of further progress on vaccines and Government Stimulus. Though both of these factors still pose massive risks, and any bad news on either of these two things could send the markets negatively. Unfortunately, while extremely important to us here in New Zealand, the prospect of a renewed lockdown and deeper recession is unlikely to play a major part in New Zealand’s lockdown or economic situation.

We are likely to see a greater impact on the NZD than the New Zealand stock markets. We have already seen the NZD weaken c.1c down to 0.65c. If Level 3 extends, we will probably see a further weakening of the currency.

What will this do to our KiwiSaver balances?

The beauty of KiwiSaver is that most funds are very well-diversified portfolios and include exposures from around the world, so anything that happens in New Zealand only has a small impact on your KiwiSaver balance. Most KiwiSaver growth funds will have exposure to the New Zealand equity market of 20-30% at most.

Your KiwiSaver balance will be driven by what is happening internationally far more than what is happening in the New Zealand market. We, therefore, don't anticipate this to impact your KiwiSaver account materially. 

It is important to point out that risk always exists with your KiwiSaver investment - there are a number of risks, we do not know if or when they might play out but they can appear at any time, we just don't believe that this latest outbreak here in New Zealand will drive an impact on your KiwiSaver accounts.

Markets are notoriously hard to second guess or try and time. People have been saying for the past 5 years that the market is overvalued and destined for a crash yet we remain at or close to record highs. At Kōura, we believe that choosing a great investment strategy and asset allocation and sticking to it will always win out versus trying to pick the peaks and troughs - now is no different to that.

What should I do right now with my KiwiSaver plan?

Right now is a great time to look at your KiwiSaver portfolio and make sure that it is set up properly for you and your objectives. KiwiSaver funds have largely recovered from their March lows, so take this opportunity to make sure you are in the right fund.

Just remember the key KiwiSaver investment rules - if you need the money in the short term you need to be in a conservative fund and if you have a long time until you need the money (at least 5 years) you should be in a growth fund.

Given the uncertainty surrounding us right now, it is critical that you understand how much risk you are taking and whether that level of risk is right for you. We saw in March the impact of KiwiSaver members who were sitting in the wrong type of fund and switched from a growth fund to a conservative option. Take the relative calm that we have right now to set yourself up properly if we go through something similar again.

If you have recently joined Kōura your KiwiSaver account should be well set up for your situation. If you have generated a Kōura portfolio and have yet to implement that portfolio, then now is the perfect time to do it, make sure you are well set up for whatever the market might throw at us over the next few weeks/months.

Not sure how much risk you are currently taking or how much risk you should be taking? The Kōura portfolio generator will help you find the right KiwiSaver plan for you.

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