GOOD NEWS – MySuper (most smartMonday members investment option), and all Multi-asset Options have recouped their losses incurred during the February/March Covid related share market turmoil, producing positive returns for the calendar year.

ASX – (Australian Stock Exchange) listed companies were ahead by 1.7% by the end of the calendar year. This modest overall result hides the extreme loss, and subsequent recovery, which can be seen in the chart below.

Key Reserve banks around the world implemented very supportive monetary policies in 2020 and reduced interest rates – with Australian rates at their lowest ever level of 0.10% at present. This means assets which are categorised as cash, such as your standard bank account or ‘term deposit’, are no longer earning as much interest as they had in previous years.  General borrowing interest rates have also reduced substantially compared to prior years (RBA¹).

Fixed interest markets (government and corporate bonds) finished the year with the interest earned on a bond (the yield), near historic lows, reflecting Reserve bank actions to influence demand for bonds. (Bonds are debt securities, often purchased for the yield they offer investors). One implication of such a supportive strategy is the risk of future inflation (a general increase in prices of goods) particularly in the US. This risk has helped longer maturity bond yields (such as 10-year government bonds) creep back up because investors have an expectation that future interest rates may rise. Nevertheless, interest rates are expected to be very low for a very long time. In Australia, the yield for bonds maturing in the next 3 years are being managed to closely mirror our current cash rate (0.10%).

Source: FactSet, January 2021.

The recovering investment environment created winners and losers with a very wide spread of returns. Growth companies that focused on disruptive technology performed strongly, while old economy businesses and banks performed less well. As the largest companies in the world are predominantly focused on technology, global shares performed well even though their were numerous laggard firms.

The returns for members invested in overseas assets were negatively impacted by the increasing Australian dollar. Whilst the strength of the Aussie dollar reduces the foreign revenue of many Australian companies, Iron Ore and Coking coal (Australia’s 2 largest resource exports) achieved new price records in A$ terms, which should bolster resource sector profits and government tax receipts. In this more positive environment emerging Chinese action to reject certain Australian agricultural and resource exports is a risk to watch.

smartMonday’s results for the full year reflect the benefit of holding a diversified portfolio of investments. Our flagship MySuper strategy avoided the worst returns of February/March yet captured much of the recovery that followed. However, our decision to invest solely in liquid securities (meaning they can be sold quickly), has provided for more return volatility than many super funds experienced, and our peer position has varied as a result (see table below). However the benefit for members has been more flexibility to adjust the investment strategy and we have been using this to make tactical adjustments, reducing our exposure to international bonds when bond yields bottomed and then taking profits in growth assets as the recovery unfolded.

For the moment the global economy continues to recover, although the pace has slowed. Unemployment rates have been lower than anticipated and the degree of Government response seems to have been a key factor. Australia has been amongst the fortunate so far, however lockdowns in Melbourne and in some parts of Sydney are timely reminders that the economic recovery can falter quickly.

We see the actual roll-out of an effective set of COVID-19 vaccines as essential to drive a bullish global economic recovery narrative for 2021. Economists with a positive outlook believe that the 2021 recovery should be strong as the pent-up demand from consumers unable or afraid to spend in 2020 is released. Australian, US, and German household savings ratios are currently at 19%,16%, and 15%, respectively, 2-3 times the pre-Covid-19 levels. In our view these savings levels add support to the position.

Whilst we agree the consumer is well placed to spend, we think the government stimulus and policy environment that arrested the losses, and started the recovery rally, in late March must continue. The key policy of low cash rates and bond yields are vital to maintaining confidence, which will allow government borrowing to remain affordable. We expect that this path will continue even if inflation starts to seep in.

Markets have a more challenging, although still positive story. Even though economic activity remains way below year-ago levels and corporate profits in developed countries have declined 15% or more during the 2020 calendar year, global share prices are up strongly, and above previous peaks in many markets, including the US. Corporate bonds are expensive again compared to government bonds (at 2019 levels) even though defaults are higher now. If we are lucky, stimulus and vaccines will allow markets to sustain these levels, providing time for the economy to catch up.

We believe the risk is low that government stimulus will be withdrawn prematurely. Thus, we do not expect large market falls to materialise. In our view, a more likely scenario is too much stimulus is applied, leading to inflation and eventually price risks for assets such as shares which tend to be supported when bonds yields are low. This could mean challenges arrive for the most expensive shares, in areas which have seen huge growth in the recovery rally, such as technology names and the consumer discretionary sector.

Both risks seem small compared to the possibility that the vaccine rollout does not go to plan, or more troubling, that economies fail to pick up even after mass vaccinations. This could happen if consumer and business expectations and confidence stay subdued. Worries over rising tax rates in the future to pay for higher government spending could be a factor holding spending back.

Overall our central expectation is positive for shares (more for Australia than the US), neutral for bonds, with the expectation that long global bond yields should move up slightly. We remain on the look-out for Responsible Investment ideas that can add incremental return.