Market movements – May 2020 update
COVID-19 remains the key theme in financial markets. While we have observed a severe market correction and subsequent pullback, there is considerable debate about the outlook and the shape of any recovery. Whatever happens, it appears likely that the world will not be the same on the other side of the pandemic.
Most listed investment markets have already priced in movements in the sentiment of where they think the markets are heading. These get priced daily with market sentiment and global geopolitical tensions factored in. Some of the underlying longer term assets and less frequently valued assets are a little behind. However, AvSuper has been working hard to ensure that all of our Investment Managers are updating their valuations frequently when necessary.
There are also emerging pockets of opportunities for our Investment Managers to take advantage of. It is in these uncertain times that some of the best opportunities arise. So whilst we remain vigilant across our total investment portfolio, we are also noting where we can make improvements and capitalise on any opportunity.
AvSuper has been working hard to keep your investments working hard for you and to provide the support you need in these challenging times. There have been members in need of the early release super payments in April and May, and we expedited those claims as quickly as possible.
There was also a number of members who switched their super assets across to the Cash option. This behaviour from members across different super funds was also noticed during the GFC and the results of that behaviour can be used as a guide for navigating through the current turbulence.
The following chart shows the likely effect of switching to Cash after a market fall – the GFC in this case. It is based on an average member with a starting balance of $50,000, invested in a median balanced/growth fund and receiving 9.5% SG contributions thereafter*:
|Descriptor||Behaviour||Balance after 10 years|
|Stressed (orange)||moves to Cash and never returns to the default option||$126,893|
|Anxious (blue)||moves to Cash option and returns to the default option after 2 years||$189,065|
|Timer (dark blue)||moves to Cash then returns to the
default option after 1 year
|Trusting (green)||remains in the default option||$207,463|
Primarily, AvSuper is keeping our focus on decisions in the best interest of members during this crisis, including long-term strategies and outcomes. History has suggested that it’s actually those periods of greatest discomfort that produce the best medium and longer-term outcomes. Whilst we expect there to be more short term pain and possibly negative returns, we note that in any crisis, there will be buying opportunities.
Many members like to compare returns from other super funds. One thing to remember whilst doing so is that no super fund is alike so comparisons can be flawed in key areas. Investment returns for each super fund differ due to the underlying composition of their investment portfolios. You really need to dig deeper to get the true picture of the investment differences between super funds.
Despite a significant rally in equities during April, financial markets remain fragile. Governments around the world must walk a fine line as they prepare to reopen their economies. A balance needs to be struck between allowing businesses to open their doors while preserving the integrity of public health. Volatility and sentiment reflect this challenge. While prices have rallied, positioning and belief in the rally have lagged. Fears of the ‘second wave’ of COVID-19 have held many institutional investors back from committing to significant positions in their portfolios. Instead, most institutional investors raised cash during the market crash and currently still hold highly liquid positions.
There is an increasingly sympathetic view that COVID-19 may lead to some very large shifts in geopolitics.
Once the peak of the pandemic has passed, the Western world may turn away from China. In this scenario, nations will likely attribute the outbreak to China, highlighting its attempt to supress information of the new virus initially. COVID-19 highlighted the inherent problem of having a nation’s supply chains concentrated in China (or any single country). For instance, the US was too reliant on China for medical supplies. When the global supply chains broke, this impacted the ability of the US to fight the virus, irrespective of its source. The US will diversify their manufacturing to other Asian nations with relatively cheap labour such as Taiwan and Vietnam, as well as bringing some manufacturing back to the US as insurance. If other Western nations follow this movement to diversify, even as global growth regains its footing, Chinese growth is likely to be structurally impaired. Since 2008, China was responsible for 60% of the world’s growth. These levels seem unlikely to be replicated in the coming decade.
The impact of COVID-19 is reverberating across the financial sector. Addressing these challenges will take astute short and long-term thinking. Australia has one of the most robust superannuation systems in the world and it will continue to play a key role in the economy. However, as Australia considers the future of our super system, it is important the discussion stays fact-based and rational in the face of market volatility and widespread uncertainty.
The big question for all investors is how COVID-19 impacts how we value earnings from different companies, and how that in turn impacts valuations. Looking beyond the middle phase of this pandemic, picking winners and assessing predictability of earnings is always challenging in a world where technological change is so rapid, and COVID-19 has exacerbated this – even for businesses which we believed had enduring business models and monopoly revenue streams which look very different under pressure. One of the main issues going forward is to hold investments through the crisis and not be in a forced seller position.
COVID-19 has brought a lot of issues into question as members look to access their super early, or simply to move out of asset classes they perceive as being riskier into the perceived safe haven of cash or fixed interest. We need to remember that Listed markets don’t always get valuations right and note that the United States has had a recession every decade since 1770, so a recession is unfortunately not an unusual event. The trigger this time is different, but dealing with a bear market and a recession is part and parcel of what we do as superannuation trustees, so it’s really important for members not to panic and maintain a long-term view.
Overall super funds’ returns bounced back in April, mainly due to stock market movements delivering around 2.2%. Remember that during the GFC, some returns were as low as -21% at one point – the COVID crisis has not hit as deep (financially) as the GFC with the average fall around -10.4%. However, most funds are tracking to an expected small negative investment return for 2019-20.
The ASX 300 has now rebounded 20% from its low (as at the end of April 2020), recapturing just over a third of the drawdown from the February high. This is lagging the 31% bounce in the S&P 500, which has retraced about 60% of its fall. The NASDAQ is up 33% from the low and is three-quarters of the way back to its high. This divergence is partly explained by index composition, given a higher weighting to financials – and less in growth stocks – on the ASX.
It is tough to make a high conviction call on the direction of investment markets from here. As we have mentioned previously, the scale of the two opposing forces – economic downturn and policy response – is material. This is why we will continue to position AvSuper’s portfolio prudently to perform across a range of scenarios, rather than making a heroic call on the outcome.
* Assumptions for the table and chart provided by Froniter Advisors Pty Ltd are as follows:
– starting salary of $50,000, increased 2.5% pa for inflation
– starting balance of $50,000
– SG contributions from employer at 9.5% of salary
– returns at SR50 Balanced
– it is a historical calculation so the chart is not necessarily in inflation adjusted dollars
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