For the last month the coronavirus has steadily extended the pandemic across the world, with major crises occurring in Italy, Spain and increasingly the US. Global infections are above 1.2 million, and deaths total 65,000, although both these numbers rise significantly every day.
Australia still appears to be in the early stages of the outbreak, with 5,775 cases and only 34 deaths at the time of writing. Encouragingly the rate of increase of infections has dropped in response to the governments ‘social isolation’ measures, although the expectation is that the worst is yet to come.
Financial markets have continued to exhibit wild swings, although equity markets have recovered slightly since the 23 March, in recognition of the massive stimulus measures being put in place by governments around the world.
Share markets have borne the brunt of the collapse in investor confidence, with most markets off 20-25% during the March quarter. The global share market index was off 21.5% in local currency terms, although the weakness of the Australian dollar meant it only fell 10% if left unhedged.
Australia fared relatively poorly, falling 23% during the quarter – its sector composition (heavy in financials and materials stocks) didn’t help against an expectation of a severe economic setback.
Commodity prices also fell, although none more so than oil, where a breakdown in talks between Saudi and Russia sparked a collapse in March. Despite a significant bounce in the last few days, following a Trump tweet foreshadowing production cutbacks, the oil price is currently half the level it started the year at.
All ‘risky’ asset prices retreated – corporate bonds (particularly non-investment grade), currencies outside the US, Europe and Japan, listed property trusts and industrial commodities all fell. The only safe places to hide were cash, high quality government bonds and gold. At Tasplan, we’ve already implemented valuation reductions in our unlisted infrastructure and property portfolios to reflect the new, more sombre, outlook.
The outlook for both the global economy and financial markets remains extremely uncertain. There’s no doubt most economies will suffer a very substantial fall in growth during the next six months, with output potentially falling by 15-20% for those countries during a ‘lockdown’ period. Unemployment will rise dramatically, although all governments are trying to implement support packages to keep both businesses and individuals afloat. However, markets are trying to look through this chasm to see whether the sudden collapse will be followed by an equally rapid rebound when the virus comes under control and restriction measures are eased.
These are unprecedented times and forecasting is very difficult. Economists are debating whether we’ll see a V, U, W or even L-shaped recovery! It seems likely that there will be a rapid snap back in economies as restrictions are removed, but whether the private sector can provide sufficient demand when government support programmes are removed is a big ask. Both business and consumer confidence have been shattered by events, and the risk of a renewed uptick in the virus is likely to remain for some time. In addition, governments have taken on substantial new debts to prevent collapse, and at some point, this may curtail their ability to continue stimulus programmes.
It seems very likely that interest rates will remain very low for a considerable period of time, and this implies that bond yields are unlikely to rise significantly. At some point investors should return to share markets, given the paucity of returns available from safe assets, but until the economic outlook is more certain, this move could be delayed. The same reasoning applies to other risk assets such as infrastructure, property and corporate bonds.
There are likely to be far-reaching consequences of the current upheaval – the globalisation trend is quite likely to be reversed, particularly in industries determined to be of strategic importance, which will raise prices and dampen emerging markets’ growth. The need to monetise the substantial government debt burden could eventually lead to a resurgence in inflation, although this looks a distant concern at this juncture.
Australia faces the same issues as most developed economies. We entered the crisis with low government debt, which is positive, but our small open economy may suffer from increasing unilateral trade restrictions. On the negative side, we have very high household debt, mainly financing residential housing, and this may constrain a resumption of consumer demand when the crisis passes.
As we described in our last bulletin, super is a very long-term investment, and most fund members have significant exposures to shares, property and infrastructure in their portfolios. They will have suffered losses over the last quarter due to the widespread market fall, but this follows a 10-year period when returns to most asset classes were very strong. For long-term investors the most sensible advice is to stick to a long-term strategy to provide a decent level of super to access during retirement, and to accept that investing in high-return asset classes will never be a smooth path.
Tasplan utilises a lifecycle approach for its MySuper default option, which gradually reduces exposure to risky assets as you approach retirement. The benefit of this approach has been made clear during the coronavirus crisis – although our young members have seen significant unit price setbacks (albeit following several years of strong returns), our older members in the ‘Tasplan OnTrack® Maintain’ cohort have seen losses of less than 1%, financial year to date, despite the equity market falls. This performance underlines the importance of ensuring that you’re invested in funds that have the right risk and return preferences for you, together with the value of using diversified asset pools.
Given the uncertainty regarding the economic outlook, it’s impossible to predict whether share markets have tested their lowest levels, or could fall further in the short term. However, as long-term investors we believe that trying to time markets during periods of upheaval is very difficult, and sticking to long-term investment strategies is the most sensible approach.
®Registered to Tasplan Pty Ltd ABN 13 009 563 062.