July 2020 Market Update

Our Chief Investment Officer Tim Macready explains what happened in financial markets during the 2019/20 financial year as a result of COVID-19, and how this has impacted your super. Watch our video summary, or read more details below.

 

How did my super perform last year?

According to research company Chant West, the median growth investment option^ finished the 2019/20 financial year with a loss of 0.5%. However, our My Ethical Super investment option, which is where the majority of our members have their super invested, delivered a positive return of 0.37% last financial year. While this isn’t the level of investment return that we target for this option, we’re pleased that we’ve been able to deliver a positive result for our MySuper members during one of the toughest financial years we’ve experienced in recent times.

If you’d like to see the investment returns for any of our other investment options (including our pension investment options) please visit the Investment Returns page on our website.

 

What happened last financial year?

The year started well, with steady returns across the September and December quarters.  By mid-February, My Ethical Super had returned 6.9% and was on track for a strong year.  This was driven by steady economic growth, along with low (and falling) interest rates, encouraging investors to invest more in property, equities and other more growth orientated assets and away from cash and low-yielding bonds.

But, in February, concerns about the likely economic and financial costs of COVID-19 began to hit markets.  Markets recognised the emerging threat that COVID-19 posed to economic growth and market sentiment.  By March it was clear that there was going to be a serious economic impact, with nearly 7 million people losing their jobs in the United States in a single week, and countries around the world locking down to prevent the spread of the virus.  The World Bank sharply cut their economic forecasts across the world.  The gains of the first seven and a half months of the financial year were quickly wiped out.  Markets were volatile, with large swings occurring based on the extent to which markets believed the pandemic was under control or could be managed with minimal threat to national economies.

However, in April, markets disconnected from underlying economic fundamentals.  Efforts by governments around the world to reduce the economic impact started to take effect.  More significantly, financial markets saw the effects of further interest rate drops, which in turn increased the price of riskier growth assets.

 

What do we predict moving forward?

From here, the investment environment is likely to be a challenging one.  The United States 30-year treasury rate has fallen from 2.3% to 1.3%, with the 10-year rate falling from 1.8% to 0.6%.  This all points to an economic outlook that is significantly worse than it was at the beginning of 2020, and markets expect interest rates to be very low for a very long period of time.  COVID-19 has caused long-term damage to many economies.  We are yet to realise the full extent of its impact across all spheres of life. Even now, Australia is experiencing a second wave of infections and associated restrictions, while the virus is still spreading rapidly across the United States, Brazil, India and Russia.

This means there is still significant uncertainty.  While Australia has not yet seen the negative interest rates now common across Japan and parts of Europe, rates are still very low, and are likely to remain this low for years.  A significant amount of economic stimulus has been deployed across the developed world, in an effort to support economies and individuals suffering from the economic effects of COVID-19 lockdowns.

The consequent low interest rates will affect all our investment options over the medium term.  The Ethical Cash option will continue to provide a low-risk haven for members who do not wish to take investment risk, but, unless we see a rapid and significant global economic recovery, Cash is unlikely to deliver returns above 0.5% p.a. for the next few years at least.  Our other investment options will be exposed to varying levels of growth assets to try to obtain higher investment returns, but are likely to be volatile as geopolitical events, economic uncertainty, the continued impact of COVID-19 and the U.S. election all create uncertainty.  The world, and consequently investment markets, seems a more uncertain place today than it was twelve months ago.

 

What does this mean for you?

  • If you have a number of working years ahead (e.g. you are under 55 years old)
    For members who still have a long time to invest, we believe the long-term outlook is still strong.  The economic impact of COVID-19 doesn’t point to fundamental underlying weakness, but rather to an external shock that will cause a temporary dislocation.  The longer the lockdown continues, the higher the likelihood of permanent economic damage, but the global economy was in reasonable shape heading into this pandemic and should show some resilience once effective treatments or a vaccine are developed.
  • If you are nearing retirement (e.g. you are over 55 years old)
    Members who are approaching retirement should consider their tolerance for investment risk, particularly if they intend to take their balance as a lump sum rather than as an income stream. While we have delivered 11 consecutive years of positive returns, we expect that returns during the next few years might be volatile. For those looking to take an income stream, it would be prudent to expect low inflation and low interest rates for the foreseeable future.
  • If you are already retired or on a pension
    Members who are in retirement and drawing down should consider their investment choice.  While inflation should remain low, reducing the cost of living pressures on retirees, our Ethical Cash investment option is unlikely to provide a meaningful level of income over the next few years.  Even in retirement, superannuation can be a long-term investment.

If you would like to speak with someone about your investment option or would like to better understand the financial advice options available to you, click here to learn more about our phone-based financial advice options.

Throughout the challenges of this current season, we will continue to strive to steward the best retirement outcomes for our members. We believe that our distinctive faith-based, deeply-engaged, and disciplined investment approach will continue to deliver strong, long term investment performance.

 

Tim Macready
Chief Investment Officer

 

The information provided in this blog post is general information only and does not take into account your personal financial situation or needs. You should consider obtaining financial advice that is tailored to your personal circumstances.

^ Chant West define a growth investment option as having 61-80% growth assets and the remainder in defensive assets.