Re-opening the economy – what does it mean for super investments?

As the spread of COVID-19 (coronavirus) starts to slow in some countries, many governments have started to implement plans to re-open businesses and relax social distancing. However, the key challenge remains – how do we balance the health risks with the benefits of re-opening our economies, recognising that these are closely linked? And what does it mean for super investments?

Forecasting the on-going economic impact of COVID-19

Like many countries around the world, Australia is facing an uncertain economic future, with governments and investors trying to gauge how long the downturn will last, and how severe the impact will be.

In the absence of a vaccine, health experts warn we will need to stay alert to help control future outbreaks and limit the spread of COVID-19. Controls such as social distancing, travel restrictions, broad testing, contact tracing and strict hygiene measures are likely to stay in place for the foreseeable future, and continue to affect the way we work and live.

AustralianSuper is working hard to understand and forecast the on-going economic impact of COVID-19 and position the portfolio to deliver the best retirement outcomes for our members.

How AustralianSuper is responding – key points
  • April and May saw sharemarkets rebound, but we expect them to remain volatile for some time.
  • The Fund is closely monitoring real-time data and key economic indicators to gauge the depth and duration of the downturn.
  • AustralianSuper remains focused on maximising the long-term retirement outcomes for our members.
  • We are leveraging the insights and experience of our 170-strong investment team to guide our investment decision making and identify new investment opportunities.
  • We encourage members to stay focussed on the long term and remember the important role diversification plays in times of uncertainty.

Members: How has your super been impacted?

So far this financial year, the Balanced option (where most members invest) has delivered a negative return of minus 1.1% (from 1 July to 31 May 2020). While history tells us we can expect a negative return about once every 4 to 5 years, this financial year is likely to be the first negative return for the Balanced option in the last 11 years – since the GFC period.

It’s important to remember that returns reflect the performance of each asset class and their underlying investments. The defensive characteristics of cash, fixed income, and unlisted assets have provided some protection to members’ returns when sharemarkets performed poorly throughout March. On the flipside, investments in shares have largely been responsible for the improved returns experienced in April and May (and the strong growth over the previous 10 years).

READ MORE: 18 SUPER INVESTMENT TERMS TO KNOW


What’s happening in sharemarkets?

The recent swings in sharemarkets have been large in both directions: 

  • March quarter: The Australian sharemarket fell 23.4% during the quarter. At its worst, it was down 36.2% between the peak on 20 February to the trough on 23 March1.

  • Month of April: The Australian sharemarket gained 9.0%1, the highest single-month return since 1987. This was even more pronounced in the US, where markets recorded a 12.8%2 return

  • Month of May: Markets remained volatile, but performed particularly strongly in the second half of the month. The Australian sharemarket gained 4.6%1 and the US market added 4.8%2.

We expect this market volatility to remain for some time, as markets continue to respond to updates on both the virus and the economy. This won’t start to subside until economic data starts to paint a clearer picture of the depth and duration of the impact of the virus on the economy, and more importantly, the path to recovery.

 It’s important that members remain focused on their long-term goals.

We expect market volatility to remain for some time, as markets continue to respond to updates on both the virus and economy.

Members who switched to more conservative investment options in the last 3 months would have locked in share market falls from March, and then missed out on the market rebounds that we saw in April and May (as demonstrated below). This highlights the risks of switching investment options in response to short-term news flow. Switching investment options should always be carefully considered. Over a long period of time, returns can be significantly affected. If you’re thinking about your investment options, consider speaking to an adviser.

 

Example: The negative impact of switching

On 18 March 2020, the government announced steps to restrict movements because of COVID-19. If an AustralianSuper member had switched from the Balanced option to the Cash option at this time, the member’s return for the financial year to date at 31 May would have been minus 7.11%3.  

However, if the member had stayed invested in the Balanced option throughout this period, the fall would have been a more modest minus 1.1%3. This is because the Balanced option invests in a broad range of asset classes, including shares, which rebounded strongly in April and May, while low interest rates provide a much lower return for the Cash option.

What’s the outlook for the economy?

Infrequent, unusual events like the COVID-19 pandemic are called external shocks. This means they are not part of the normal economic cycle, with its usual ups and downs. External shocks are much more difficult to plan for, as you don’t know when to expect them, or the depth and length of their impact, until they occur.

In Australia, the Reserve Bank of Australia is currently forecasting that GDP growth will fall by 6% in 2020 and recover by a similar amount in 20215. It expects higher levels of unemployment will persist for some time, and growth will be more subdued until this extra capacity can be absorbed.

In Australia, the Reserve Bank of Australia is currently forecasting that GDP growth will fall by 6% in 2020 and recover by a similar amount in 2021.

What is less clear, and what is of interest to long-term investors like superannuation funds, is what it means for the economy’s longer-term growth path.


How is AustralianSuper monitoring the economy for Members?

As a superannuation fund, we invest over long periods of time to maximise the retirement savings of our members. This means we are not just looking at the short-term impact of COVID-19, but also at how it will affect the economy over the long-term.

We are closely monitoring economic conditions to understand how different sectors and industries are likely to be impacted and recover from this downturn. The insights and information we gather help guide how we construct the members’ investment portfolios and select the companies and assets we invest in.

To do this, we leverage the experience of our 170-strong investment team. This team is closely monitoring the current situation and adjusting the portfolio as required. We’re also watching for new investment opportunities that can benefit members’ returns.


How AustralianSuper uses economic data to support decision-making

The investment team carefully analyses key economic indicators, including traditional economic data, forward-looking surveys and real-time data to gain a better understanding of the economy’s performance and outlook.  

Key economic indicators include:

  • Unemployment numbers
  • GDP (Gross Domestic Product) – a measure of economic growth
  • Inflation
  • Retail sales
  • Household savings
  • Job advertising
  • Manufacturing output
  • Business investment
  • Housing approvals
  • Wages growth
  • Consumer and business confidence surveys
  • Real-time mobility and consumption data

The potential pitfalls of backward-looking indicators

When we look at economic indicators it’s important to remember that the data we’re presented often looks backwards – reporting on the previous few months of activity. These are known as lag indicators, with numbers often released months after the period they are measuring. Key lagging indicators include GDP (economic growth), inflation and unemployment.

This is an important point, because investment markets are forward-looking.

Investors make decisions based on predicted future outcomes. This means that expectations about company earnings, unemployment, economic growth, etc, are factored in when the investment decision is made (often months earlier). So, when we see markets move on the release of this type of economic data, it’s usually because the data has not matched the forecasted results.

Lagging economic indicators can therefore help us understand the exact impact on a specific period, but they may not be that useful for looking forward – particularly if economic conditions have changed significantly by the time they are released, as we expect them to over the next few months.

This will be an important point to remember in a few months’ time, when the negative data for the current June quarter (1 April – 30 June 2020) gets released. This data will reflect the Coronavirus lockdown situation, where large parts of the economy, such as restaurants, pubs, cafes, cinemas, travel agents, etc, were forced to close. By the time the data gets released in July, August and September 2020, however, many businesses are likely to have re-opened in some way, meaning that the (backward-looking) data may not reflect the true economic situation at that time.

Using real-time data to get real-time insights

To help build an understanding of what’s currently happening (and likely to happen) in the economy, AustralianSuper therefore also analyses real-time data (see below) and forward-looking surveys. These surveys look at consumer and business confidence, as well as investment, hiring and consumption intentions. This combination of insights, paired with the experience of our investment team, helps guide our short, medium and long-term investment decisions.

Real-time (or high frequency data, as you might have heard it referred to) is essentially data on activity that (thanks to technology) is available on a daily or weekly basis. When viewed together, they can offer real-time insights into what is currently happening in the economy.

Real-time data includes:

  • Mobility tracking (e.g. the Google Community Mobility Report6 shows people’s movements to essential retail (grocery and pharmacy), retail, recreation sites, workplaces, transit stations and parks)
  • Electricity demand
  • Consumption activity (such as restaurant bookings and cinema takings)
  • Auction clearance rates (property)
  • CBD pedestrian numbers

Having real-time data is especially helpful in the current situation, where economies are starting to open up, and traditional (often backward-looking) economic indicators are unlikely to capture their real progress for months to come.

Bringing these 2 types of data together helps the Fund build a picture of how quickly consumers and businesses are starting to resume normal (pre-virus) activity – and gives us some indication on how quickly we can expect the economy to recover.


We’re here for Members

We understand that many members have been through challenging and stressful times in recent months, and we want to assure you that we are working to improve outcomes, so your super supports you in retirement. 

Super is a long-term investment. We encourage members to stay focused on their long-term retirement savings goals, especially in periods of market volatility. And to remember the potential benefits of staying invested in a diversified portfolio with exposure to both growth and defensive assets over the long-term. AustralianSuper offers fully diversified PreMixed investment options to limit the impact of market downturns and maximise the potential for long-term growth. 

Over the last 10 years, AustralianSuper’s Balanced options has provided members with an average return of 8.52% per year (as at 31 May 20203). And AustralianSuper’s Balanced option remains the #1 performing fund over 5, 10 and 15 years in the SuperRatings survey4.

READ MORE: MARKET CYCLES AND SUPER IT’S ALL ABOUT THE LONG TERM

 

Before making investment decisions, Members should consider their financial requirements and their personal objectives, situation or needs. For those who have seen their balances fluctuate and are concerned about changes to their retirement plans, our team is here to support you. Please contact us if you have any questions or are looking for further information about your super.

 

CONTACT AUSTRALIANSUPER

Sources

1. S&P/ASX300 Accumulation Index.
2. S&P 500 Index.
3. AustralianSuper performance data May 2020. Investment returns are not guaranteed. Past performance is not a reliable indicator of future returns. 
4. SuperRatings Fund Crediting Rate Survey - SR50 Balanced (60-76) Index, 30 April 2020.
5. Reserve Bank of Australia’s Statement on Monetary Policy: Economic Outlook, May 2020.
6. Google Community Mobility Report, May 2020.


*Investment returns are not guaranteed. Past performance is not a reliable indicator of future returns.

This may be general financial advice which doesn’t consider your personal objectives, situation or needs. Before deciding on AustralianSuper read the Product Disclosure Statement available at australiansuper.com/pds. AustralianSuper Pty Ltd ABN 94 006 457 987, AFSL 233788.

Trustee of AustralianSuper ABN 65 714 394 898.

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