Article

COVID-19 and its impact on investment markets

Super and investments 101 | Date Posted: 3 April 2020

As Australia and the global community continue to face the spread of Coronavirus (COVID-19), we understand the current market fluctuations are naturally causing concern for our members.

So, to help you better understand what’s happening on investment markets and how it’s impacting your super, we’ve prepared the following information. We’ll continue to provide updates via this page to support members.

While the current shifts in investments make it a difficult and emotion-charged time, it’s important to remain focussed on the long-term and ensure your strategies align to your personal situation and goals.

If you’re unsure what to do, please reach out to us on 13 64 63 or help@mine.com.au

What has happened to the share markets?

Share markets have been unusually volatile over the last few weeks and share prices have fallen from their peak in February 2020.

Why did share markets fall?

The COVID-19 coronavirus has spread rapidly across the globe and is threatening to overwhelm public health systems in many countries. In response, Australia – in line with most other countries – has imposed restrictions to stop the spread of the virus, which are impacting the economy.

In many countries people are now unable to commute to their place of work, travel or visit shops, pubs, restaurants, cafes, cinemas, gyms etc. This means many businesses have closed or are very quiet with a large number of people in ‘non-essential’ jobs being made unemployed.

This has had an unprecedented impact on economic life in Australia and around the world. Profits of most companies are expected to fall significantly, and investors are very uncertain when this situation will recover. This makes companies less attractive than they were earlier in the year, which is reflected in lower share prices.

However, it’s important to note that, this follows a prolonged period of strong growth in share prices, both globally and in Australia, that may have increased the value of your super. Most established companies also pay a dividend, which the fund re-invests – dividends do not tend to fall in line with a dip in share prices.

Will share markets recover?

Over time, it’s generally expected that share markets will recover.

The outbreak of the virus is expected to be temporary which will mean that the slowdown in the global economy is a one-off event which should not detract from long-term economic growth.

Pandemic-type events do sadly occur from time to time and normally do cause share market volatility. However, markets generally bounce back within a few months, following signs of them being brought under control.

Even large market falls such as what we’re currently seeing are not unprecedented – the Australian and US markets have both fallen by more than 30% on six occasions since the late 1920s for non-pandemic reasons.

But markets have always gone on to recover – historically shares have performed strongly over longer time periods.

Governments have announced massive spending measures to keep businesses and workers afloat during the current period of restrictions. Central banks have slashed interest rates to all-time lows in many countries to support the economy when recovery comes.

Why is market volatility going on for so long?

Share markets are volatile because there is no certainty about when the virus will be brought under control and markets generally don’t perform well when there’s uncertainty. 

In fact, markets often actually react better to bad news than to uncertainty because it is easier to react rationally to bad news and move on.

What is Mine Super doing now?

Our investment team continues to follow our long-term strategy aiming to deliver the best possible retirement outcomes for all our members.

This includes making ongoing adjustments to the investment portfolio to keep it aligned with set goals and not panicking by locking in losses as markets swing around.

So, should I get out of the share markets?

It is not possible to answer this with any certainty.

While shares have been a great way to build long-term wealth, the growth path is far from smooth and there will be times when values fall suddenly.

This is quite normal. Shares should be considered a long-term investment.

While the value of shares and units in super have generally fallen, the actual units have not been ‘lost’. It is only when investors sell shares (or units) following a steep fall that losses are realised and locked in – this is known as ‘crystalising a loss.’ For more information on how unit pricing works, check out this factsheet.

While switching out of shares and into cash offers some protection should the share market fall, it does mean your investment won’t benefit from any future recovery of the share price (unless you re-enter the share market at an opportune moment, which can be very tricky to time well).

Does being in a diversified option help me?

Diversified options have exposure to shares and also other assets such as bonds, cash, unlisted property and infrastructure which collectively tend to perform independently of share markets; your level of exposure to shares will depend upon which option you are invested.

Mine Super’s Aggressive and Growth options have been impacted by the fall in share markets more than the Balanced or Stable options.

In general terms, the more defensive assets you have in your option, the less the fall in the share markets will impact your account balance.

What about other assets?

Government bonds are trading at lower yields, i.e. their prices have risen as they are defensive assets. However, corporate bonds – especially high-yield debt – and inflation-linked bonds have generally been weaker.

Cash investments are only affected in that lower interest rates will reduce income.

Unlisted commercial property and infrastructure assets are only valued periodically, but generally they tend to be somewhat less sensitive to short-term share price movements.

Should I sit out the share market for a while?

That is not a question on which we can advise you, but markets can rebound quickly when investors become more certain – and getting the timing right is very difficult.

Hence, it is usually better to focus on your long-term objectives rather than short-term share price moves or market speculation.

Generally, investors are well served by following a long-term investment strategy. A diversified portfolio, with a mix of asset classes, securities and currencies is likely to be most appropriate for most super fund members.

What do I do now?

Members who are still some years from retirement will hopefully see that volatility is the trade-off for the higher long-term returns we need to meet our financial goals. Furthermore, lower share prices mean that each pay day when we contribute to our super, we are effectively buying shares more cheaply than we did at the start of the year.

Members invested in our default investment option and who are a bit closer to retirement will automatically have seen their exposure to shares reduce after turning 45. As they move into lower risk options, they will hold more defensive assets which have typically held their value during the recent market turmoil.

While we cannot offer personalised advice, you may wish to talk to a financial adviser who can. We can put you in touch with Mine Super Financial Advice who can help you better understand which options may work best for your personal circumstances.

 

Past performance isn’t necessarily an indication of future performance and forecasts are not guaranteed. The risks for each investment option may vary. Check the Product Disclosure Statement before making any investment decision.