Market update July 2020
Following one of the fastest falls in market history in March there is a lot of speculation about what is coming next. Are we in for a V, L, U or W shaped recovery? What’s a swoosh?
Following one of the fastest falls in market history in March there is a lot of speculation about what is coming next. Are we in for a V, L, U or W shaped recovery? What’s a swoosh?
Markets have been moving a lot this year as we’ve mentioned in previous updates in June and May. A quick recap - the March quarter resulted in one of the fastest falls in market history, people sometimes refer to that as a ‘bear’ market. The direction reversed in the June quarter, with markets recovering at an extraordinary pace, particularly in the US where the S&P 500 index posted the largest 50-day advance ever recorded.
There is a lot of speculation as to what will happen next and these terms – like a V or a W – are being used to describe the way the market might move up or down.
The swoosh, like the Nike logo, suggests that after a market fall a long large recovery should follow. The V suggests a faster recovery and the W suggests a second drop in markets. No one knows exactly which way it will go.
Returns across the last quarter do indeed look like a swoosh. However, no one is sure what pattern the future will take. The “new normal” we are moving towards is uncertain at this point in time. Some reasons to be cautious have surfaced recently, such as surging infections in the US and Victoria and clusters around Australia.
Source: BMO Economics, Harvard Analytics, Bloomberg
There is still a substantial amount of government stimulus in place providing positive momentum. This brings optimism that we are well on our way to building upon our great long-term returns and the lows experienced in March will not be tested again.
Governments have been supporting their economies with initiatives designed to keep companies afloat and put money in the pockets of affected employees. Keeping companies operating and consumers buying helps keep the economy moving.
JobKeeper and now JobKeeper 2.0 are great examples of these initiatives in Australia. The Australian economy is not yet able to support itself and that’s why it was deemed important for JobKeeper initiatives to be extended. Secondly, buying assets sends a strong signal backed by big bucks that governments are ready to do what is necessary to keep investment markets functioning.
Also, reserve banks continue to intervene in markets and here the big news has been with the US Federal Reserve Bank which has started buying new types of securities in an effort to keep bond markets functioning properly.
We are happy with the results. smartMonday is a SuperRatings platinum rated fund. This is the first negative return over a financial year period we have seen since the MySuper product began.
We have seen our performance act broadly in line with expectations. Younger members in our lifecycle MySuper investment option were impacted the most as they have high exposure to growth assets.
While the result from the down and up period in markets (ie. that ‘swoosh’) was negative for some members, the results achieved are an excellent outcome given the economic damage wrought by the COVID-19 pandemic.
Many of our members that are invested in the MySuper strategy are sticking with their long-term plan – which means they will benefit from the market recovery, or stay protected if they are an older member. It’s important to remember that members have enjoyed a long run of solid returns for the last decade through to early 2020 and you can see this in this chart of long-term returns.
Source: SuperRatings Fund Crediting Rate Survey June 2020, annualised and shown net of fees and taxes
Some super funds have posted a positive return for the year and there are others with large losses. The broad range of performance results between super funds recently can be explained by two key factors:
Super funds have different levels of exposure to what is called alternative investments. Often, such investments are valued infrequently and can appear less volatile in the short term - which may be seen as an advantage if prices fall quickly.
For example, property. Chant West, a leading investment research firm, recently compared property listed on the ASX with unlisted property and found very different short-term returns for quite similar assets. Unlisted property: -2.1% Listed property: -20.7% for the year to 30 June 2020.
We would expect that over the long term the performance of both types of property investment should be similar, so perhaps returns from unlisted property might be quite challenging for some time as the losses are factored in
The problem is that in the short-term such technical issues make it very difficult to compare returns between super funds. That’s why we encourage members to focus on long-term returns.
Source: SuperRatings Fund Crediting Rate Survey June 2020, www.superratings.com.au
Yes, our lifecycle approach is designed to protect members as they move towards their weekend.
When members are starting their superannuation journey, when they are under 35, the option has a higher exposure to growth assets. Growth assets have a higher risk profile but allow members the greatest chance to increase their returns, while defensive assets have a lower risk profile which can lead to more moderate returns.
In planning and development of this investment model, smartMonday factored in exactly what has been happening in markets recently. Younger members will see more fluctuation in their investments – whilst this means they are exposed to falls, they may also benefit the most from rebounds. Given they have a considerable time to retirement the strategy allows them to have plenty of time to recover from any losses.
At the opposite end, members who are at, or nearing, retirement in the 60 and over categories, whose investment options may be comprised of more defensive assets don’t have as much time to recover. The model is designed to protect them.