Market update and impacts on your super
Market Overview - July 2020
Have some questions? Have a look at these FAQs for answers.
Overall, in July, the share market rebound extended to July delivering small positive returns despite continued volatility. All investment options delivered small positive returns during the month, reflecting the small, positive returns achieved across most asset classes.
Other key drivers of performance during July 2020 included:
- Further evidence economic activity has improved since lockdowns were lifted and this continues to provide support to financial markets.
- Defensive asset classes delivered slightly positive returns and most growth asset classes delivered small positive returns.
The impact of COVID-19 continued to dominate share markets globally. Many economies continued to lift their lockdown measures which increased consumer spending and confidence, however, easing lockdown restrictions has also led to a rise in new COVID-19 infections in most regions.
Domestically, Victoria enforced Stage 4 ‘Stay At Home’ restrictions. In response to the Victorian lockdown, economists downgraded Australia’s economic forecasts, prompting Treasurer, Josh Frydenberg, to announce there would be "another phase of income support” along with the extension of JobKeeper and JobSeeker payments to the end of March 2021, albeit with tightened eligibility criteria and lowered rates. The combination of these factors saw the Australian Stock Exchange (ASX) experience increased volatility throughout the month, however, finished in positive territory.
In the US, daily new infections continued to rise throughout most of July. As a result, many States have begun to partly reverse or pause their reopening plans and this has affected consumer behaviour in those areas. There are continued concerns around the structural damage from the pandemic. The US economy is experiencing a second wave of corporate layoffs, along with major US companies declaring bankruptcy. US Q2 GDP fell by an annualised rate of 32.9% compared with the previous quarter. This confirms the largest decline in GDP since the Second World War, however investors have been more focused on the recovery. The US Q2 earnings season is underway, with expectations of roughly a 45% year-on-year earnings decline. With over 55% of companies having reported, earnings have come in a little stronger than expected, a positive for share markets.
Europe looked to have managed the virus better than many other regions in Q2, though concerns around rising cases remain. European Union (EU) leaders held a two-day summit to discuss the proposed EU recovery fund. After five days of deliberation, there was unanimously agreement to an unprecedented €750 billion "Next Generation EU" (NGEU) recovery fund - to support member countries' recovery from the pandemic-induced recession, and multinational financial framework (MFF) - the regular EU Budget - amounting to around €1.1 trillion over seven years. Financial markets responded well to the news.
Chinese markets reacted favourably to the containment of COVID-19 with China becoming the first major economy to return to positive annual economic growth following the COVID-19 outbreak.
The Reserve Bank of Australia (RBA) held cash rates at 0.25%. The July policy statement highlighted uncertainty about the speed of Australia's economic recovery and the uncertain nature of the health situation, affecting consumption and investment plans. The RBA noted it will maintain its accommodative approach, as long as required.
Other central banks including the US Federal Reserve and the European Central Bank left monetary policy unchanged.
How movements in share markets impact your superannuation option?
Movements in share markets (up and down) impact the unit prices of all Super SA Investment options, with the exception of Cash. As unit prices change so does the overall value of your superannuation balance.
Although portfolios are not immune to the volatility stemming from share markets, Super SA’s asset mix, including high quality bonds, property, private equity and other unlisted assets, have helped to lessen the gyrations and deliver a smoother return profile for members.
Notwithstanding short-term fluctuations in share markets, the best long run guide to the investment outcomes of the Super SA options is their investment objectives. For example, the Triple S Balanced Investment option is targeting a return averaging 3.5 per cent above the inflation rate when measured over long-term periods (of at least 10 years).
The expectation of negative returns
One of the most important concepts to consider when making an investment decision is that of risk and return. All investments, including super, have some level of risk.
Members should be aware capital losses are possible, depending on the investment option(s) chosen and their performance over time. Fluctuations in investment markets will have on-going impacts on performance. This volatility is a normal part of investing and can occur with money you may have in other super funds, the share market and other types of investment.
Each option’s investment objective provides an indication of risk by stating the number of negative annual returns likely to be experienced over any 20-year period. For example, for the Triple S Balanced Investment option it is expected the investment strategy will result in between four to six negative annual returns over any 20-year period. This means the risk of a negative return in any single year is between 20 per cent and 30 per cent.
The Chart below illustrates the annual returns of the Triple S Balanced Investment option since inception in 2000.
Chart 1: Triple S Balanced option annual returns to 30 June*
Returns net of fees and gross of tax
*Triple S Balanced Investment Option annual returns to 30 June, 2020.
Looking back over the history of the Triple S Balanced Investment Option, it has recorded a negative return for financial year periods four times, including the 2019-20 financial year. This is in line with expectations (4 to 6 years in 20).
The expected range of annual return outcomes also provides an indication of risk. This varies between the options. Generally, options with the highest potential long-term returns also come with the widest range of returns including the possibility of negative returns. Options with the lowest potential long-term returns come with the narrowest range of returns and greatest likelihood of positive returns.
Each of Super SA’s investment options has a different level of risk and return, as shown in the graph below.
Chart 2 Expected range of returns over a 1-year period*
*Source - Super SA Investment Fact Sheet. Note there is approximately a 5 per cent chance the return could lie outside of this range.
Understanding your attitude to risk is important and this may change over time. You may wish to periodically review your investment strategy to make sure it still meets your needs.
Switching your investment option is an important decision
It’s not easy to time entry to, or exits from, markets. Selling out of more risky options (i.e. those options with larger allocations to assets such as shares and property) and switching into less risky options (such as cash and options with higher allocations to fixed interest) can be costly over the longer term as it effectively locks in the losses which result from poor investment markets. As well, it is possible to miss out on future growth by being out of the market when it recovers.
We understand you may be concerned about the impact of market movement on your super. We encourage you to think about your super as a long-term investment generating a return over multiple years. We suggest you don’t focus narrowly on short-term results.
Many members seek professional financial advice, especially those members approaching or in retirement.
There are a number of investment options offered by Super SA to suit members with differing risk appetites and time horizons.
Have more questions? Have a look at these FAQs for answers.
Funds SA Disclaimer
The information in the article above has been prepared in good faith by Funds SA. However, Funds SA does not warrant the accuracy of the information and to the extent permitted by law, disclaims responsibility for any loss or damage of any nature whatsoever which may be suffered by any person directly or indirectly through relying upon it whether that loss or damage is caused by any fault or negligence of Funds SA or otherwise. The information is not intended to constitute advice and persons should seek professional advice before relying on the information.