19 May 2020
Global market investors were more cautious over the last week, although that was reversed overnight with encouraging news of an experimental Coronavirus vaccine, seeing markets surge.
The Coronavirus remains a key focus although the vaccine news lead to optimism economies may reopen faster. At the same time, tensions between China and the US escalated as the Trump administration seeks to blame China for the outbreak, with some Australian sectors such as agriculture also hit by steep tariffs on barley while some beef imports were banned completely.
Last week markets were surprised when New Zealand’s reserve bank announced negative interest rates will become an option in the future, while in the US the idea was met with mixed reactions from President Trump and policy makers.
All the uncertainty has supported gold, which has risen to a 7-year high and oil has rebounded as supply cuts hinder supply and reopening ramps up demand.
Domestically consumer and business confidence both bounced from depressed levels last week, although still remain very weak. The focus was on Australia’s unemployment figures, which rose 1% to 6.2% in April. This revealed a fall of 594,000 jobs, which may still be understating the underlying impact of Covid closures.
Recent focus on vaccine and potential hopes of reopening has had a positive effect on the Australian Dollar which has risen around 1% on the week to US65.40 cents.
The week ahead will see less market activity driven by economic data. Investors will focus on the Reserve Bank of Australia’s (RBA) May meeting minutes and the Australian Bureau of Statistics’ (ABS) estimates of April retail sales, likely to show steep falls.
Overseas, stock markets will be swayed by US jobless claims, while in the UK the focus will turn to April’s employment figures. The broader sentiment will however rest on China’s response to global calls for a Coronavirus investigation.
13 May 2020
This last week was characterised by a more upbeat mood and stocks moved higher across globe, particularly in the US.
However, globally the relationship between the US and China deteriorated which has put pressure on some trade-related sectors, such as agriculture, mining and manufacturing both globally and domestically. Some investors overlooked this, with positive sentiment being driven by Governments winding back Covid restrictions, with measures in the UK, France and Germany easing.
Locally, Prime Minister Scott Morrison released a three step plan to opening, although individual States and Territories will move at different times. The prospect of economic activity resuming saw the Australian dollar move higher to buy 64 US cents. Helping push the currency higher was a rise in commodity prices, with Oil rebounding strongly over the week as re-opening rolled out.
Economic data however did reflect the positivity in global markets. In the US last week April payroll figures fell a huge 20.5m in April, due to US unemployment rising to 14.7%. In Canada there were a further 2m jobless people in April, with the unemployment rate rising from 7.8% to 13% while Ireland’s unemployment rate rose a staggering 28.2%.
Looking ahead, Australia’s employment data will be released this Thursday, with the RBA forecasting unemployment to rise to 10% by June and to remain high for some time. Investors will also be focused on Australia’s business and consumer confidence survey results, which are likely to show just how negative the mood is, while Australia’s federal Budget which was due this week has been postponed to October.
Offshore all eyes will be on the US and China retail sales figures in order to gauge the speed of the recovery as their populations emerge from lockdown.
27 April 2020
On Friday investors propped up the US stock market, after a week of stocks being subdued on coronavirus uncertainty.
Some of Friday’s stock market gains were due to US re-opening hopes, and as US Treasury secretary Mnuchin said he predicted the economy would “really bounce back in July, August and September”.
In addition, Coronavirus deaths again showed signs of slowing over the weekend and many European countries announced cautious reopening timelines. This comes in spite of the US passing the milestones of 1m Coronavirus infections and 50,000 deaths.
The other major news headlines related to speculation that South Korean leader, Kim Jong Un has died, which if true could lead to a significant political reshuffle in the region.
In commodity markets, oil rose 2.7% to 16.94 per barrel as Saudi Arabia announced early production cuts and as US producers close wells.
The Australian dollar was up 0.2% to US 63.35 cents, which is a sign of investors being open to take on slightly more risk.
Looking ahead this week the major central banks, the European Central Bank, the US Federal Reserve and the Bank of Japan will all meet and investors are expecting further monetary easing could be announced. This is despite the huge amount of monetary policy action in recent weeks.
In the US companies are coming out with their earnings reports for the first quarter of the year. This week will see the tech giants Facebook, Amazon, Apple and Microsoft report results, which will be closely followed by global investors.
In Australia attention will be focussed on our first quarter consumer inflation figures on Wednesday, which is likely show the average cost of key household goods and services has softened in the year to date.
20 April 2020
Stock markets in the US and Europe rose at the end of last week as investors focused on the US’ re-opening plans and on hopes of a COVID-19 treatment and antibody testing. The weekend also saw positive news, with New York’s death rate declining and European infection rates peaking.
China’s economic data was a large focus for investors, with first-quarter GDP down by 6.8%. However, offsetting the bad news were signs that the country’s return to work is having a positive impact, with reopened factories leading to a bounce in industrial activity in March.
The global oil price remains low, falling another 8% to US$18.27 per barrel, down a further 8% as supply overwhelms demand.
The Australian Dollar and New Zealand Dollar outperformed as risk sentiment improved and both countries showed positive signs of containing the COVID-19. The Australian dollar is buying 63.55 US cents.
Looking ahead in Australia this week, the main focus will be on a speech by Reserve Bank of Australia Governor Philip Lowe tomorrow, and on more indicators of how the local economy and businesses are coping with COVID-19 shutdowns.
Coronavirus to cause the sharpest economic downturn of our lifetime
17 April 2020
A review of investment markets to 31 March
Markets started 2020 with a sense of optimism due to lower geopolitical concerns, central banks keeping interest rates low and generally strong consumer and labour markets. The spread of COVID-19 quickly disrupted this upbeat outlook, though markets initially remained confident in the idea of a ‘V-shaped’ recovery and share markets touched record highs in February.
All this turned quickly with the global spread of the virus outside the original epicentre of China. When the World Health Organisation declared coronavirus a pandemic on 11 March 2020, share markets fell swiftly, with the US S&P 500 and ASX 200 falling by around a third from late February to mid-March, before recovering some of these losses.
On 14 April 2020, the International Monetary Fund hit the nail on the head with a blog titled ‘The Great Lockdown: Worst Economic Downturn Since the Great Depression’.
Governments globally have reacted to the pandemic by ‘locking down’ their citizens and shuttering their economies in an effort to control the spread of the disease. This is essentially a forced ‘pause’ in economic activity, with governments declaring that many service businesses must close, and citizens must stay at home except for essential reasons. In essence, this was engineering an unprecedented collapse in economic activity.
In an effort to support their economies, central banks globally have pushed rates lower and are pursuing further policies to support cashflow in the market, as well as the flow of credit. Governments have also taken measures to support citizens and businesses who have been affected.
We’ve quickly seen several countries announce large government spending plans to provide money directly to affected industries and workers displaced by the shutdowns. The US announced a US$2 trillion plan, the largest in history, while Australia has announced several packages amounting to over A$200 billion. While these numbers are staggeringly large, our sense is that they fall short of the activity that will be lost due to the shutdowns. At this stage, we expect to see further fiscal announcements as governments seek to support economies through this period.
Markets have also been grappling with plunging oil prices resulting from geopolitical tensions between key oil producers. Oil prices fell by more than 50% over the March quarter, coinciding with a significant reduction in global oil demand following travel restrictions.
So what’s ahead now?
Looking ahead, we see two distinct paths for the global outlook:
- On the upside – the near-term development of a successful vaccine, medical treatments or significant improvements in testing and tracing techniques. This will allow consumers to return to their prior path, as monetary policy successfully supports the growth outlook and fiscal policy breaks the low growth environment experienced in recent years.
- On the downside – the virus is ultimately contained, whether through vaccine or herd immunity, but this takes time and has a more lasting impact on business and consumers. Likened to the impact of wartime, the coronavirus shutdown could cause a severe shock to consumer behaviour and the rise of precautionary savings and balance sheet repair. Even with extraordinary fiscal and monetary stimulus, company actions and consumer demand may remain fundamentally cautious for years to come.
Risks of switching options during market volatility
In this video, Chief Investment Officer Damian Graham talks about what's causing markets to be so volatile now, and why it’s important to focus on the long term when thinking about your super and retirement.
The risks of switching options
Volatility is expected to remain a prominent feature of markets in the next few weeks and months. Investor sentiment is constantly shifting as more becomes known about coronavirus and its potential impact on economies.
It can be tempting to consider switching investments during times of market volatility. Headlines can be distracting, and at times unsettling. You might wonder whether you should take action or simply sit tight, which might feel counterintuitive.
But switching to cash when markets are down comes with the risk of locking in losses. While you remain invested, the impact of market moves are paper losses that can be recouped if markets rebound. Conversely, switching to cash means selling out of stocks and crystallising the market falls that have already occurred. Timing markets is notoriously difficult, and history shows that most investors don’t buy back in time to benefit from any rebound in markets.
It is also important to remember that super is a long-term investment. Over long horizons cash typically does not keep pace with the cost of living (known as inflation). This means that for every $10 you save, you’ll be able to buy less with it in the future than you can now. This is a big issue because the primary aim of saving for your retirement is to be able to maintain your lifestyle once you retire. While cash experiences less short-term risk (volatility), in the context of superannuation savings, it carries a high level of “long term risk”.
Taking a long-term view can also help you benefit from the power of compounding. That’s the snowball effect that happens when you receive returns on your earnings, as well as on your original investments. It’s important to remember that while the stock market might jump around or enter a prolonged downturn, history has shown that the markets grow over the long term and eventually surpass their previous highs.
How do we manage our investments?
We manage our investments to take account of short-term risks. But we also have an overarching, longer-term risk-adjusted strategy that aims to maximise your long-term savings. With a strong and skilled investment team of over 70 people, we are closely monitoring markets and ready to take advantage of investment opportunities as they arise.
Our focus is on investing in a diversified mix of good quality assets that can grow your savings over time.
Diversification (i.e. spreading your money across arrange of investments) helps cushion the impact on our pre-mixed options from market falls.
Is my super safe?
First State Super is one of the largest super funds in the country, with over $100 billion invested in a diversified range of asset classes.
We regularly monitor and stress test fund liquidity (how much cash we have). Currently, we’re in a strong and stable liquidity position and are well prepared to navigate through these difficult market conditions. Our member base is diverse, with large contributions from the NSW public sector and the health sector and we don’t anticipate any significant reduction in inflows.
Pre-mixed optionsShow more
All pre-mixed options delivered negative returns for March and the quarter to 31 March. Negative returns seen across most asset classes as markets reacted to the coronavirus pandemic and the negative implications for economic growth.
Fixed interestShow more
Australian fixed income has performed strongly over the quarter and last year as investors sought safe havens given the sharp equity declines and risk aversion amid coronavirus concerns. The RBA has cut the cash rate to a record low 0.25% and announced other monetary easing measures, including bond purchases, to support the domestic economy. Globally, central banks have also lowered their cash rates and bond yields moved to record lows through March, although credit spreads have widened on the deteriorating growth outlook leading to negative one-month returns.
Global sharesShow more
Equities began the year with optimism and an upbeat outlook, but this turned sharply when the World Health Organisation declared a pandemic on 11 March. The S&P 500 fell by around a third from late February to March, before recovering some of these losses. Volatility has been very high as markets grapple with the unprecedented economic impact of forced ‘lockdowns’ to contain the coronavirus versus the large fiscal and monetary stimulus many countries are undertaking. The returns of international equities were cushioned by the sharply lower Australian Dollar.
Australian sharesShow more
Australian equities fell sharply over the quarter, with falls concentrated in late February and March as coronavirus concerns spread. Australia’s close ties with China, the original epicentre of the outbreak, saw local equities and the Australian Dollar fall sharply. The impact on the energy sector was particularly heavy given the oil price falls, with an OPEC supply war happening at the same time as global demand plummeting.
Past performance is not a reliable indicator of future performance. This information has been prepared by First State Super Investments on behalf of FSS Trustee Corporation ABN 11 118 202 672 AFSL 293340, trustee of the First State Superannuation Scheme ABN 53 226 460 365.