Posted on 06/04/2020
Con Michalakis, Chief Investment Officer
The Australian and global economy is entering the most challenging conditions in 90 years as it co-ordinates a response to the COVID-19 virus.
The cure to the virus is an old fashioned remedy of social distancing, hygiene and isolation until a readily available vaccine is found.
Unfortunately a vaccine may still be at least 12 months away so the current measures are all about flattening the curve and stopping the spread throughout the community. When thinking through the plan from here, we believe there are four key considerations.
The first and most important is health. We’re not experts and believe abiding by the conditions and expectations set by the Government and health authorities in stopping the spread.
The second relates to the economy. The current cure to the virus has terrible consequences for the economy and frankly mental wellbeing. State and Federal governments have tried to do the right thing with a whole range of support measures. We should not see them as “stimulus” packages and really call them “safety support packages in difficult times”. Despite the record amounts offered, we believe more will be required and the support and spending will help most get to the other side. At best we are still facing a major recession and the dislocation of individuals and businesses requiring support will increase. At Statewide Super, we are ready to support individuals requiring help in terms of hardship claims, early access to super and guidance in meeting their retirement income needs.
The third relates to general confidence. Justifiably, “animal spirits” across consumers, businesses and investors has collapsed reflecting the economy. To re-emphasise my earlier point, the measures announced by policymakers will help and we suspect there will be more announcements. Nonetheless we expect confidence to remain low until we see some light at the end of this horrible tunnel.
The last relates to markets and retirement savings. The markets have fallen and remain volatile as they adjust to the daily news flow of virus control, economy and investor confidence. We expect this to continue for a while. For those who are younger, this will not be your last market fall. I distinctly remember the last major fall in 2008/09 called the Global Financial crisis at the ripe young age of 42. By remaining at that time in Statewide Super’s default option (I’m still invested in that option), the negative returns over 6 months were easily reversed and doubled in value over the next 10 years. Bear markets are short and sharp in falls but create the environment for higher expected returns in the future. Young folks can get through this once employment and contributions come back and allow retirement savings to recover.
Older members are much more impacted by the falls. But here too there’s some comfort that an appropriate plan with a diversified lower risk option helps to cushion a good proportion of the falls. For example a conservative option typically falls by one quarter to one third in terms of returns compared to the Australian or Global stock market.
We are in strange times and the difficult road ahead will test all of us. Hopefully more support in the short term and also crucially maintaining a longer term strategy should provide a guide to see us through.