The Long and Winding Road – Market update 20/05/2020
Depending on your age and musical preferences, you may have read the title (above) and now be humming the tune to this Beatles classic, written more than 50 years ago. The song references the idea of overcoming challenges and staying the course in order to reach your goals. This is relevant for smartMonday members and their super returns – both now and into the future. We have seen some big changes in the share market so far this year and remain focussed on our members as we jointly navigate the winding road.
What’s been happening in the markets?
The current climate is referred to as ‘volatile’ – meaning that asset values have moved up or down a lot, and quickly. The COVID-19 pandemic has created a lot of this volatility. The forced shut-down has undoubtedly been a very large set-back in economic terms, globally. It really is incredible how quickly things changed in such a short period of time.
At the start of the year the Australian share market was doing pretty well and increasing in value. Share markets dropped more than 30% as the lockdown took effect with the lowest point around the middle to end of March. Markets then recovered around a third of that loss by the end of April1
While share markets can be poor at identifying the exact timing of economic turning points, the message they are providing right now seems clear. It also appears to be consistent with government and health viewpoints. Aon’s Global Macro-economic experts think we appear to be roughly mid-way through one of the largest economic declines in modern history1
. As we gradually make our way out of lockdown a fast full economic recovery seems unlikely. This means a new global normal, with lower earnings, should be expected in the medium term.
Does that mean that the worst of it is behind us now?
The share market low might be behind us, but there are a lot of challenges to come. It is possible that we will see another low, despite the recovery we saw in April. As we know, past performance isn’t an indicator of what happens next.
However, although no one has a crystal ball with which to predict the future, investor sentiment has improved. Perhaps there will be a second outbreak, maybe we will find a vaccine, how fast can lost jobs be recovered and so on – there is still uncertainty which creates volatility. There is potential that share prices could go lower again.
Our view is that it’s important that most super investors take a longer term view that reflects their time to retirement– 5, 10, 20 year horizons for example.
What else is impacting investments?
There are still many challenges and issues that we are facing. There are whole industries and business models that have been challenged during this pandemic.
Consider sectors like travel and tourism. We really don’t know when we might be able to fly either domestically or internationally. That has a huge impact on Airlines, tour operators and hotels and all the other businesses that supply the sector. The example of Virgin Australia and the difficulties they are facing is one to recall. Also, the hospitality sector is seeing major changes as our habits of dining out have been forced to change. The Retail sector has seen an incredible change too. Perhaps this has brought forward a trend that we had seen happening already – the shift to online retail.
Lots of people have been working from home and many businesses may look to the future and rethink their expensive office space. Perhaps they will re-configure it to work better with having staff at home so they can downsize and reduce costs. However, these changes are going to take some time to come through.
Will removing the restrictions make things change?
In early May many governments began relaxing restrictions. We’ve seen some of the schools re-open and each part of Australia is setting guidelines for the next phases. We expect that ending the lockdown will see a quick and strong economic improvement, but maybe not a full recovery.
The great re-opening decision is a tough one – balancing community health alongside the economic implications and of course community sentiment. We don’t know yet whether re-opening will be right from a health viewpoint, but these decisions seem necessary from an economic viewpoint to restrain the already extensive damage to businesses.
Beyond the short-term bounce we think it is difficult to judge how fast the economy recovers and what setbacks might come. While there are encouraging signs from the recent surge in markets, they remain fragile and further volatility will remain as we take the long and winding road to recovery. While the share markets look less likely to test the lows of mid-March, another fall could take place.
There is still significant risk for economies around the world, and it seems likely that additional government stimulus will be announced in the US. The actual re-opening is widely predicted by economists globally to start with a bounce in investment values, but will settle quickly and remain below 2019 levels.
What impact has government spending had?
Key governments around the world, including Australia, have acted quite decisively to put many things in place to protect everyone’s health as well as a variety of payment and economic stimulus. We won’t know for a while how effective the government stimulus packages have been to support individuals, households, and businesses. Overseas there have been many similar initiatives.
For example, the financial support includes:
- The US government is on track to inject US$1.5 trillion into its economy through asset purchases, loans and a US$1,200 check sent to eligible residents.
- The Reserve Bank of Australia cut interest rates to a record low of 0.25% and launched their first bond purchasing programme.
- The Australian Federal Government has committed billions for wage subsidies to preserve jobs (primarily the JobKeeper Payment), provided guarantees to banks for lending to small businesses and enabled early access to superannuation.
Investors have seen that governments are prepared to act to support individuals and businesses to avoid the crisis getting worst. This has improved sentiment.
What does all this mean for superannuation?
Many of our members have been asking us what this all means for their super. We’ve seen strong growth and returns for a number of years, however markets are moving a lot and we have seen recent falls1
Members whose portfolios include some growth assets have enjoyed many years of attractive returns. Compared to the same time last year, the March 2020 result is much lower for all super funds as it includes the worst of the COVID-19 crisis2
. But when you consider a three year time horizon the result is still positive - indicating that despite the turmoil in March, member returns remain positive over the long term in our Growth Index option.
Looking at the March quarter more closely shows us that the asset classes that have benefited members for many years, mainly shares, had the worst returns. But shares also had the strongest recovery so there is room for optimism that the next quarter will look ok too.
The events in the coming weeks and months will not be predictable or easy to navigate. The economic disruption we are currently experiencing is unprecedented.
Is there anything else impacting smartMonday returns?
Some super funds have more alternative investments than smartMonday. These are investments that can’t be easily categorised as a listed share, bond or cash. A few of these assets are illiquid. That is, you can’t get out of them very easily at times like this. The best example is directly invested property, and in superannuation that can be things like a shopping centre or an office building. These assets are more difficult to value fairly and quickly and what typically happens is their prices adjust across a few months or years.
There has been a fall in the value of listed property trusts1
. Re-valuations of direct property can take longer to be completed. So, partly for this reason, smartMonday’s returns compared to other Super funds in the first quarter of 2020 may appear weaker. After the next quarter end, and as markets have improved, we anticipate our returns will be stronger as we head towards the end of June.
You will be able to see those results in our next quarterly update, or by checking on the smartMonday website around mid-July.
That’s a lot to take in – can you summarise please?
Three simple points would possibly cover it:
- COVID-19 has impacted lots of things (businesses, whole industries and the way we live) which has created volatility in markets
- There is a lot of government spending that is providing support and this is helping sentiment, which has meant there has been a small recovery of losses
- There is still more uncertainty to come, though it seems possible that the worst is behind us in terms of investment markets.
Most importantly, super is a long term investment. It’s understandable to feel worried about the market losses or to feel anxious about your super, especially when short term returns are negative, like they are right now.
Your smartMonday investment managers have been making adjustments to our portfolios throughout the crisis – whilst sticking with our plan for each of the investment options.
On the way down into the crisis we allowed diversification to limit the losses our members experienced. When the markets started stabilising a little in April we started moving back into growth assets, and as we remain below our target allocations in these assets there will be more to come.
We also took advantage of the volatility to implement a new international share strategy which should benefit from the trend towards a global low-carbon economy. The financial risks of climate change are real and this change to the portfolio offers more protection, and perhaps some additional return, for members.
This situation really is unprecedented. We should all use caution. There is a lot of uncertainty surrounding any re-opening and it seems likely we might see some false starts, and maybe further market falls.
At some point we will move to a new normal way of doing business and living our lives. Businesses will continue to innovate and find new ways to create value which may start to push markets up again. It could be a quite exciting time as this innovation could come really quickly.
Need more information?
Head to your member portal and login to see an updated balance or get in touch with a smartCoach via phone, email or live chat on our website.
1 FactSet Research Systems Inc
2 SuperRatings Quarterly Report, March 2020
smartMonday is a registered trading name of Aon Hewitt Limited ABN 48 002 288 646 AFSL 236667 (Aon), the sponsor of the Aon Master Trust ABN 68 964 712 340 (the Fund). The trustee of the Fund is Equity Trustees Superannuation Limited ABN 50 055 641 757 AFSL 229757 RSE Licence L0001458. This document has been prepared by Aon. smartMonday PRIME, smartMonday DIRECT and smartMonday PENSION products are part of the Fund.
Aon has taken care in the production of this document, the contents of which has been obtained from sources that it believes to be reliable. Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose that this document may be used and accepts no liability for any loss incurred by anyone who relies on it. Any information provided in this document is of a general nature and you should seek personal financial advice that is tailored to meet your financial goals, circumstances and needs. In any case, any recipient shall be entirely responsible for their use of this document. Past performance should not be considered a guide to future performance.
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