Investment11 March 2020

Covid-19: Financial market reactions and implications

David Stuart
David Stuart
Chief Investment Officer

Financial markets around the world have experienced substantial falls over the last month in response to the worsening implications of the global outbreak of the Covid-19 virus, which has already infected over 100,000 people worldwide and led to over 4,000 deaths. This has impacted Tasplan members’ superannuation and investment portfolios, and this update will help you to understand the reasons for the price falls, and act as a guide to what may happen next.

Market reactions

As of 10 March, most global equity markets have fallen around 20% over the last month, resulting in one of the fastest price corrections in history. Other ‘risky’ assets such as commodities and oil have also seen substantial falls, and we’ve also seen the Australian dollar weaken. ’Safe haven’ assets such as government bonds have rallied strongly as fear has gripped investors. Meanwhile central banks around the world, including the Reserve Bank of Australia, have cut interest rates and provided liquidity to try to prevent a financial crisis.

Why have markets fallen?

Although the number of people currently infected by Covid-19 is small on a global scale, the economic implications of efforts to contain the virus are significant. China imposed quarantine restrictions on millions of workers, and it’s inevitable that growth has collapsed in the first quarter. As the infection has progressed to the developed world, it seems likely that measures to constrain its spread will lower growth in most countries around the world. Individuals are also likely to cut spending, particularly on travel and attendance at sports and entertainment events, and businesses will also limit unnecessary employee travel.

In addition, a meeting of OPEC+ last week failed to reach agreement between Saudi Arabia and Russia on production cutbacks to support a flagging oil price. As a consequence, Saudi unilaterally decided to slash prices and increase production, sending the oil price tumbling and causing further market anxiety.

Governments around the world will ease monetary policy and probably provide fiscal stimulus though increased government spending. This is likely to offset, but not reverse, the virus’ impact on growth.

The exact impact on global economic growth is difficult to quantify, but given a generally sluggish economic backdrop, the likelihood of a recession is high. This is why share markets have retreated.

Impact on Tasplan members

Tasplan members have significant exposures to equities, particularly in the youngest cohort of our Tasplan OnTrack® lifecycle option, the equities options and Tasplan Growth option. There will have been a fall in balances for members exposed to these options over the last month.

However, super is a long-term investment, and these falls follow very strong returns that were experienced in 2019. In general, higher volatility will be experienced by members in higher growth options, but in the long-run they will also experience higher returns. Our Tasplan OnTrack lifecycle approach gradually reduces share exposures as members approach retirement age, so that older members will have a lower exposure to the recent price corrections.

It should also be noted that Tasplan’s multi-asset options (Tasplan OnTrack, Growth, Balanced, Sustainable, Moderate and Conservative) have a high level of diversification, including ’alternative’ investments such as unlisted property and infrastructure. This diversification will significantly reduce the short-term losses resulting from share market falls.

Finally, Tasplan has been taking action to reduce risks across our portfolios, including leaving most of our international investments unhedged from a currency perspective. The recent fall in the Australian dollar will offset some of the losses from market falls.

What should Tasplan members do?

In general, super and pension fund portfolios are long-term assets, and we would caution against making significant changes while markets are in turmoil. Although economic growth expectations have fallen, markets have already moved to discount this change.

Tasplan has a fact sheet on the website discussing Market volatility, which is worthwhile reading in the current circumstances. 

® Registered to Tasplan Pty Ltd ABN 13 009 563 062.

Past performance isn’t a reliable indicator of future performance.

 

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