The Australian share market has recovered close to 50% of the losses experienced around March 2020. Continued and large-scale government stimulus packages, along with a relaxation of health restrictions has improved investor sentiment resulting in this positive shift in the market. Will the momentum continue or is there still bumpy road ahead?

Although it is not unusual to see a rally following extreme pessimism, the speed of the share market recovery has been extraordinary.

The key driver in the market rebound has largely been continued and massive government stimulus packages. Direct support to companies and employees has helped individuals and organisations get through the most significant restrictions and provided liquidity to financial markets. Recent positive news, such as faster than expected relaxation of health restrictions, and better than expected US economic data, has provided the perfect backdrop for a momentum driven global share market rally.

The US share market has moved close to its all-time high point. Whilst the Australian share market has lagged other developed markets, it has managed to recoup close to 50% of its losses from the March lows to the middle of June.

Another widely reported factor driving the rally seems to be global retail investor FOMO (Fear of Missing Out). Data provided by ASIC indicates a sharp increase in activity from previously dormant retail investor accounts in Australia. Robinhood (a US e-broker) added 3 million retail investor accounts in the 1^st quarter of 2020 alone. This growth may be a replacement for a lack of sports betting and might have been fuelled by government stimulus paid directly to these investors.

The rise in share markets in the face of bad news may feel surprising. Importantly, it highlights a key difference between financial markets and the real economy. The value of financial markets reflects a potential future position for the economy, more so than the current economic or social challenges we face. We think this means investors are already focussed on the expected conditions in 2021 and beyond that. On this timeframe, positive news on the medical front in relation to the flattening of the curve in many western countries, economies gradually reopening and expectations that government stimulus should continue or even expand are the key drivers.

The US share market has a much larger technology and healthcare component compared to Australia. In Australia, the ASX has a very large financials component. The largest sectors for each are marked in the below charts.

The environment created by COVID-19 has seen an increased demand for technology services, especially cloud related activity and online logistics delivery, which has seen these businesses perform remarkably well. In comparison financials companies have had a more difficult recovery as their future revenue potential is challenged by low interest rates and the potential for new bad debt provisions.

Another compounding issue weighing on the Australian market has been the number of companies cutting their dividends paid to shareholders, as their profit expectations have moved lower due to the shuttering of the economy. On the left-hand side of the chart the US markets have seen minimal impact, while in Australia (the final column on the right), the expected dividends have been revised down by more than a quarter. As well as suffering a larger revision, Australian companies as a group have tended to pay higher dividends compared to other countries. We think this challenge has limited Australia’s ability to participate in the global share rally so far.

This is the first time Australia has faced an economic recession in three decades. It is important to query what it could mean for super returns.

Firstly, as financial markets look to the future the probability that Australia is likely to report a recession is already reflected in the super returns experienced so far. Returns going forward should be linked primarily to how severe the recession proves to be, and how fast and strong the recovery can be. Share markets seem to be suggesting the recovery will be fast and the fixed interest markets seem to suggest that government stimulus will be needed for some time. This is why share markets have rallied and bond yields are now very low.

It is difficult to define or assess the full impact on future superannuation returns as data is limited at present. The risks we face and should be aware of include:

• the COVID-19 caseload overseas & management
• how soon an effective vaccine might be available
• employment and consumer confidence recovery
• the upcoming US election
• how governments will pay for their Covid-19 stimulus.

We’ve seen a fantastic recovery from the March market low. In some cases, prices are at or above their previous peak. Some business models have done very well from the crisis and we think their share prices can continue to be strong. Many other companies have suffered a gap in their revenue that will take time to recover or address. For this larger group it is harder for us to see recent price movements as fully justified. However, it is important to recognise that there are significant tailwinds supporting the markets: government stimulus, low interest rates and what seems to be a faster than expected reopening of the economy.

As some aspects of life return to ‘normal’ and restrictions continue to be eased, it is clear that the pandemic will have long-lasting effects on many aspects of life. The strong returns in the share market of the past two months are very unlikely to continue at the current pace and some indication of this has been seen in June with markets reacting negatively to rising coronavirus infection rates. The Reserve Bank of Australia (RBA) minutes released in June indicates their view that the pandemic as likely to have long-lasting effects and government support will be required for some time. Overseas central banks have a similar sentiment.

This leads us to the belief that the share market will be volatile for some time and may be susceptible to falls. However, with substantial government stimulus in place, and the Australian share market still not at its peak we are not expecting the ASX lows to be tested again, unless a 2^nd wave of COVID-19 or additional lockdown comes into effect.

It is surprising that only three months after one of the most significant economic regressions in living memory, that it seems possible super returns to 30 June 2020 may only experience modest losses. SuperRatings (www.superratings.com.au) have estimated that the average Australian Superannuation fund growth Option could provide a small negative loss for the year to 30 June 2020.

The rapid volatility experienced recently leads us to believe that a lot can happen in the remaining trading days prior to financial year end. Although past performance is not a reliable indicator of future performance, we agree returns are looking better compared to the end of the first quarter of the year.

We know a negative return, however small, could be concerning for members. We would encourage all members to remain focused on long-term investment returns. When considered over a broader time frame, members have achieved good returns.