Investment Update

It is extremely difficult to see your investments or superannuation take such a large and swift fall as we have seen in the recent weeks.

We have put together a couple of charts to try and illustrate the context of this market correction both over the long term and very short term.

The first chart below shows the Australian share market since 2006 up to April 1, 2020 including dividends. Both the 2008 Global Financial Crisis and the current market falls are clearly the most significant. The rebound in 2009 was also significant.

The second chart shows the movement in the Australian share market over the last 3 months to 1 April 2020 represented by the blue line. The massive swings in daily gains and losses is shown by the red bars (market down) and green bars (market up). Prior to the correction the size of the swings were consistent and much smaller with mainly ‘green’ days as the market moved to its peak.  Uncertainty will continue to drive high volatility as we have seen in the last 3 weeks and may go on for some time until this health crisis comes under control.

The Benefits of Diversification.

Keep in mind that most investors hold diversified managed funds and assets such as cash, fixed interest and property will reduce the volatility somewhat and reduce the extent of negative returns compared to being 100% invested in shares (as per the above charts). Our fund managers have been defensively positioned for some time now which will provide some protection against negative share markets.

Also, you still hold the same amount of investment units you held before the market fall, they have just dropped in price. While it is difficult and worrying when we see such dramatic falls in investment values in such a short space of time, losses are not realised until you sell, until such time the drop in value is just on paper.

While we don’t know how long this will go on for and where markets will settle, when this crisis finally passes and we get back to business, investments will rebound and returns will improve once again. History has shown us that it is best to sit tight and when things turn around you will not be left on the side lines.

The Past Month and Looking Ahead.

Below, Toby Loakes, partner at Crestone Wealth Management talks about the last month and Crestone’s thoughts on the different market scenarios that could play out.

“Easing geo-political tensions and better growth momentum as we entered 2020 are but a distant memory. The month of March delivered rolling shocks – from the spread of COVID-19 outside China, to the collapse of oil prices and the unfolding realisation the virus was rapidly breaking out across Europe and the US. With economies locking down, a global recession involving Australia now seems likely, and one of the sharpest bear market equity corrections in history has transpired. This month we consider the path ahead, including alternative scenarios.

Key points are:

  • As we enter Q2 there are likely to be increasing signs in the data of the sharp decline in growth that is unfolding. There are already glimpses of this where composite purchasing manager indices for March have collapsed to recessionary lows. However, policy makers have responded aggressively to the threat of a global recession with fiscal and monetary support.
  • We consider three scenarios for transitioning the COVID-19 crisis. Our central case is a U-shaped recovery where there is only a moderate permanent loss of output. In this scenario equity markets likely rebound solidly by end-2020.
  • The other two scenarios include a V-shaped recovery and an L-shaped recovery. In a V-shaped recovery there would be limited permanent loss of output, and the equity rebound would be materially stronger, with indices returning in 2021 to pre-COVID-19 levels. In an L-shaped recovery the spread of the disease is harder to contain than expected, and recovery only emerges from mid-2021. The correction in equity prices is deeper than the other two scenarios, and any rise in equity indices is more sluggish and drawn out.

 

While H1 2020 will contain challenging economic data, an inevitable rebound in activity, be that mid-year or a little later, underpinned by an increasingly historic policy stimulus should deliver a rebound in risk appetite in time.”

How Will This Affect My Retirement Goals?

If you would like to assess how your retirement goals are impacted based on the current lower fund balances, we would be happy to provide some high level projections and modelling for you. Despite the recent significant falls in investment values, we have seen in recent client reviews that the impact on client’s longer term overall financial position in most cases has not significantly changed.

These are difficult and unprecedented times for all of us. Take care of yourselves and your families and please, do not hesitate to call us if you would like a chat or if you have any questions or concerns.

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