October 2020 Market Update

Our Chief Investment Officer Mark Rider explains what has happened in the first quarter of the new financial year and what we expect to see moving forward.

 

What has happened in recent months?

The COVID-19 pandemic continues to dominate the global economic outlook. After the spread of the virus slowed in most developed market economies into the middle of the year, there has since been a resurgence across Europe and the United States, while infections have continued to climb in many other parts of the world.  Despite the rising trend in infections in the developed world, the shutdown response has been less severe with the current wave, with few countries returning to the widespread lockdowns that characterised the response earlier in the year.  As a result the economic impact of restrictions has been more muted this time around and a recovery from the deep recession in the June quarter has continued to play out. The Chinese economy has led the global economic, aided by few new infections.

Despite the continued advance of COVID-19, global share markets have rebounded sharply from their fall earlier in 2020. Technology stocks have led the way, with the acceleration of the uptake on a range of online activities in response to COVID-19 making them a clear winner relative to more cyclical and so called “value” stocks that require a stronger overall economic environment.  Developed market bond yields remain very low as central banks commit to leave official interest rates close to 0% for a number of years into the future.

The Australian economy has been through a difficult period, contracting 7% in the June quarter. The second wave COVID-19 outbreak in Victoria has had a major impact on the state, reversing the recovery that was underway at the end of June . Meanwhile, the remaining Australian states have continued with their scheduled but cautious reopening dates, enabling activity to gradually resume, which should help to cushion the impact on GDP growth. The AUD has performed strongly, gaining over 30% to above 70 cents since the last quarter.

 

How has this impacted my super?

While recent investment returns are lower than they have been, we’re pleased to report that our investment options have been performing well during the last year. The investment returns for the majority of our options, including our default My Ethical Super product, are in the top 25% of comparable investment options for the most recent 12 month period.* This is a great result during a challenging season, and a reminder that it’s possible to invest ethically and still get a great return.

If you’d like to view the investment returns for our investment options (including our pension investment options) please visit our Investment Returns webpage.

 

What do we predict moving forward?

Looking ahead to the December 2020 quarter, a great deal of uncertainty remains. With COVID-19 containment measures relaxed in many places around the world compared to earlier in 2020, economic growth is improving as countries re-open. However, the recent resurgence of COVID-19 cases in the US, Europe, and some parts of developing economies may slow down the progress of economic recovery. The International Monetary Fund and World Bank expect a fall in global growth of around 4.4% in 2020 before a rebound of 5.2% next year. Market expectations are that corporate earnings will only be back to their 2019 level by 2022.

Listed equities have recovered strongly following the substantial government financial support to Australians and businesses. The rebound in equities has been echoed in credit markets, where policy measures to support credit markets have upgraded investor expectations for the corporate sector. The likelihood of a sustained period of near-zero interest rates means that demand for quality yield-producing assets will remain strong.

Notwithstanding the already immense and co-ordinated policy response, we believe the impact of the current economic downturn is unlikely to pass quickly due to the dislocation of several industries and many jobs. There will be gaps in cashflows in all global economies and sectors that have not been plugged by policy. There is still uncertainty over the delivery and rollout of a vaccine.

With the current climate, we will continue to maintain a cautious but optimistic view of portfolio strategy and asset class positioning. Furthermore, we look to build our real asset exposure over the coming years to benefit from the long-term value creation opportunities thrown up by the current economic and financial environment.

 

Mark Rider

Chief Investment Officer

 

* Source: SuperRatings data. SuperRatings classify investment options based on their percentage of growth assets rather than the name of the option. For example: My Ethical Super is included in the SuperRatings Balanced group of options which all have 60-76% in growth assets.