How to ride out the impact of coronavirus
The recent increase in market volatility has created a challenging environment for investors and the wider superannuation industry.
We take a look at some of the important things to consider about your super and pension during times when investment markets are affected by events such as the coronavirus.
What's happening?
China first reported the outbreak of coronavirus in late December 2019 and most cases and deaths have been in the Hubei province. Chinese authorities responded with travel restrictions and many countries banned travelers entering from China.
The virus was assumed to be relatively contained. However, coronavirus has now spread to 48 countries and the US Centre for Disease Control states that “current global circumstances suggest it is likely that this virus will cause a pandemic.1 Locally, the Australian Government has enacted its pandemic plan to ensure a proactive response.2
Market volatility increased again on 9 March 2020 after weekend reports from Italy of a 25% increase in infections and further event cancellations and travel restrictions. The markets are now anticipating economic impact from China due to supply and demand as many other countries hit ‘pause’ on economic activity.
On 3 March, G7 finance ministers held a conference call and that led to a coordinated series of central bank rate cuts, aimed at supporting economies through the coronavirus crisis. The Reserve Bank of Australia cut interest rates to a new record low 0.5%, while the US Fed made a cut of half a percentage point.
1 https://www.cdc.gov/coronavirus/2019-ncov/your-health/covid-by-county.html
2 https://www.abc.net.au/news/2020-02-27/federal-government-coronavirus-pandemic-emergency-plan/12005734
How have markets reacted?
Markets started 2020 with an optimistic tone and before the rapid virus spread outside of China, markets were relatively confident in the outlook. It was assumed there would be a temporary impact to Chinese growth, but Chinese authorities could deliver stimulus to counter this.
With a backdrop of ongoing central bank support, markets were looking through the impact of the virus and pricing in a ‘V-shaped’ recovery. That is, a sharp decline followed quickly by a sharp rise back to its previous levels.
When the virus spread outside of China these assumptions changed and it’s now looking like the impact to global growth will be more severe, with recovery taking longer than originally expected. Additionally, the crucial role that China plays in global supply chains has become clearer and many global companies are now reporting delays in sourcing input materials and products.
The negative outlook has seen investors seek the relative safety of government bonds. This demand, combined with global central bank rate cuts through March, have caused bond yields to fall to record lows, driving positive returns to fixed interest investments.
What does this mean for my super and pension going forward?
Market volatility is expected to remain a prominent feature of the next few weeks and months of 2020 due to the coronavirus, its potential impact on economies and related shifts in investor sentiment. While headlines can be distracting, and at times unsettling, it’s important to remember that super is a long-term investment.
At StatePlus we manage our investment portfolios with longer-term objectives in mind. This means we look beyond the daily news and focus on investing in a mix of good quality assets that can grow your savings over time. So rather than reacting to short-term events, we prepare for them by including strategies to diversify market risk and help smooth the ride.
We also diversify our pre-mixed options across many asset classes including property, infrastructure, bonds and shares, as well as alternative investments that aim to perform well during periods of market volatility. Spreading your money across a range of investments can reduce the impact of a poor performance in any one asset class.
I’m concerned, what should I do?
Most of our clients choose to ride out the ups and downs, but those who do switch tell us that negative returns are the main trigger.
When you see others reacting to a falling share market, it can be hard to accept that doing nothing is often the most sensible response. But during times of heightened volatility, it’s even more important to focus on your long-term strategy and think carefully before making any significant changes.
Switching to a more conservative option, such as cash, after a market fall can lock in losses. This may mean you miss out on any rebound that occurs.
For example, the market falls that resulted from the October 1987 crash, tech bubble burst in 2001, September 11 terrorist attacks and 2008 global financial crisis, were all followed by a strong bounce back within a relatively short timeframe.
Trying to time markets is difficult
Think about this this way – a loss on your statement remains a paper loss if you remain invested because it’s possible you’ll recover any losses as markets rebound. However, switching to a more defensive investment option removes this potential and locks in that loss.
Short-term market volatility typically has little overall impact on long-term returns. Markets are also inherently unpredictable and trying to time them means you must get two important decisions right: when to get out, and when to get back in. There is a risk of having to pay a higher price to get back into the market, as well as missing out on the potential growth from any market recovery.
The important thing is to choose an option that is appropriate for your age, investment timeframe, risk tolerance and any investments you have outside of super.
History has shown that having a long-term plan and sticking to it gives you the greatest chance of reaching your retirement goals, and that those who do this ultimately end up better off than those who change investment options.
It’s tempting to switch to cash, but is it the right decision?
In volatile times, you may be thinking about switching your investments to cash. We all know that cash has the lowest market risk and the potential for loss is negligible. But while cash can protect against negative returns, its value does not usually increase over time, and with today’s very low interest rate environment, the level of income is also low.
This leaves cash investments susceptible to inflation risk. That is, the return on your investment may be lower than the rate of inflation, meaning the purchasing power of your money would not actually be growing. This is a really important consideration for your retirement savings, and highlights the long-term risk associated with investing in cash.
Investing over longer periods (10 years or more) means that your investments will probably have time to ride out short-term ups and downs and keeping up with inflation is your main risk.
Further questions?
The most important thing is to have a sound, long-term investment plan that will help you achieve your retirement goals.
However, we appreciate the impact of events like these can be unsettling, and that everyone’s situation is different. If your situation has changed or you’re feeling uneasy, be sure to speak to your financial planner.
