Investment Update - March 2020
- 04 Mar 2020
Daniel Selioutine, Head of Investments, takes the opportunity to review market activity and the Fund’s performance..
Market Update:
After an unusually strong 2019, global equity markets continued to grow in the New Year before correcting in February 2020.
News headlines were dominated by the outbreak of the coronavirus which overshadowed more positive news from the US and China officially signing the first phase of a trade deal and the UK finally exiting from the European Union. Concerns about the coronavirus becoming more widespread heightened financial market volatility as investors became increasingly concerned about the threat of the virus to the global economy.
Global interest rates remain low as monetary policy authorities continue to maintain an expansionary policy stance, driven by subdued inflation and emerging downside risks to economic growth. The Reserve Bank of Australia (RBA) held its cash rate target unchanged at 0.75% p.a. (a historic low) at its February meeting, citing its desire to support employment and income growth. The US Federal Reserve, along with other major central banks, also kept interest rates unchanged at expansionary levels in their recent meetings while signaling their intention to keep rates low in the year ahead.
Following a period of economic stimulus in 2019, the Chinese economy was starting to show signs of stabilising when news of the coronavirus outbreak worsened in February 2020. China experienced a significant drag on its economy, with manufacturing activity significantly declining as factories shut in an effort to contain the outbreak. The Chinese Purchasing Managers’ Index (PMI), which measures manufacturing activity, declined by 29% in February compared to the previous month. As the virus continued its rapid spread, governments across Europe introduced emergency measures to halt further escalation and to support a subdued Eurozone economy, including the Italian government who announced a £3.6 billion injection into the economy, in addition to a £900 million stimulus package to mitigate the impact of the outbreak.
Asset Class Returns:
Slowing activity and investor fear surrounding the emergence of the coronavirus has reduced the large positive returns to US equity markets. The S&P fell 8.2% (USD) over the month of February 2020 after rallying 31% over calendar year 2019. Other equity markets similarly followed suit, with the FTSE 100 also declining 9.0% (GBP) and ASX 200 declining -7.7% (AUD) over the month.
Defensive assets performed strongly in this environment, with global bonds comprising the Barclays Global Aggregate Index (hedged into AUD) rising 1.2% during February 2020 and generating 9.3% year-to-date for investors. Australian cash returned 0.08% over February, with cash returns decreasing following the RBA’s decision to reduce the cash rate target over the second half of 2019.
Accumulation Plan Performance:
All of the Accumulation Plan Investment Options outperformed their respective objectives over the year to 29 February 2020, despite the February correction in equity markets. Longer term performance also remains above respective investment objectives.
ESSSuper Accumulation Plan Investment Option Performance:
One Year to 29 February 2020 (net of tax, net-of-fees).
Outlook:
The coronavirus outbreak continues to evolve and the outlook for financial markets remains uncertain at this time.
While the outbreak is expected to have a short temporary impact before financial markets eventually recover, there is some evidence suggesting the strategy of containing the virus may result in adverse economic impacts being more protracted than expected.
Positively however, developed market governments and central banks appear to have signalled an intention to stimulate the economy (i.e. decrease interest rates or increase government expenditure) if required, which should provide support to financial markets over the medium term. Further, the correction experienced by equity markets in the month of February is healthy following a period of very high outsized returns in 2019.
ESSSuper is positioned more defensively than the typical super fund due to its downside protection philosophy, providing increased portfolio protection for our members.
Investment Options have outperformed their investment objectives over longer periods.
The impact of switching:
Switching Investment Options to lower risk Options can lock-in investment losses and miss out on the potential for higher returns by being out of the market when it recovers.
As financial markets remain uncertain, it's important to remember that markets can recover quickly. Members are encouraged to take a long-term perspective when considering their superannuation investments.
Our message at this time is to stay focused.
Super is a long-term investment, so while investment markets can be unpredictable over the shorter term, they typically recover over the longer term.
If you’re approaching or are in retirement, it’s still important to stay focused on your long-term investment strategy and consider all your options before making any significant changes.