A world where animal spirits are running wild is also one that has temporarily divorced from fundamentals. Experience tells us this often doesn’t end well.Â
The wealth transfer from Baby Boomers to their offspring, which is in full swing, has got the taxman’s full attention, especially as it pertains to capital gains payments, trust structures and potential breaches of the Tax Act’s Division 7A.
What Coronavirus means for funds: it’s not good
SuperRatings, the research house, said over the weekend that super funds had a positive start to 2020, with the median balanced option returning 1.9 per cent in January, driven predominately by gains from Australian and International shares. But, the Coronavirus emanating from China, has made February a lot more difficult in investment terms.
Markets have, this month, been affected by the outbreak of the virus, which led to a selloff in global share markets as investors sought out safe-haven assets. Asian equity markets have borne the brunt of the initial impact, but the effects are likely to be felt across global markets, noting that previous outbreaks over the last two decades have resulted in short-term equity market corrections within a range of 5-15 per cent.
According to Kirby Rappell, executive director at SuperRatings, super funds face the “new normal” of lower returns and yields. Managing volatility is becoming increasingly necessary. However, despite the current swings in the market, he says. But funds need to remain focussed on long-term member outcomes.
“The funds we’ve spoken to are not responding to the current market situation with knee-jerk reactions,” he said. “They’re watching developments closely, but so far market volatility has been in line with similar risk events experienced in recent years. Fund investment strategies are generally well placed to manage these types of movements.”
Looking back at previous epidemics, such as the Ebola outbreak in 2018 or the SARS epidemic back in 2003, Australian super funds have proved relatively resilient to short-term market movements. Quarterly returns during each episode have ranged between -2.1 per cent and +4.3 3er cent, with markets largely unfazed over longer periods.
Whether the effect of the Coronavirus has a more lasting impact on markets remains to be seen, but funds are unlikely to implement any dramatic changes to their investment strategies without further evidence that the virus will deal more prolonged damage to the global economy.
Con Michalakis,the CIO of StateWide Super in South Australia, said that while there would undoubtedly be some economic fallout, the fund remains focused on long-term member outcomes. “This is a classic case of a black swan, and like all black swans the markets struggle with uncertainty,” he said .
“What we can be sure about is that the economy in China and Australia will be slower due to the restrictions in place in the first quarter of 2020. However, from a long-term perspective, diversification and strategy based on member age and risk tolerance is more important.”
Meanwhile, Suzanne Branton, CIO at Care Super, said her fund’s investment strategies were designed to provide downside protection during bouts of market turmoil. “When new influences on the investment outlook emerge, it’s important to analyse and monitor these closely,” she said. “There could be a short-term impact that provides investment opportunities or avenues to adjust positioning. However, there are reasons to expect a more short-term rather than extended large-scale market impact. Our investment approach is structured to deliver downside protection so our investment program resilience to short-term volatility is high.”
– G.B.
