WA Super News

How is Coronavirus (COVID-19) impacting your super investments?

04/03/2020

The spread of the Coronavirus (COVID-19) infection and its impact on global economic activity has troubled investors and created uncertainty and speculation in the media following recent equity market falls.

Since the beginning of the year, COVID-19 has spread from China to many parts of the world, with 93,123 confirmed cases and 3,198 deaths as at 4th of March 2020 (based on Johns Hopkins University’s analysis). Whilst there is a lot of uncertainty that remains around the overall impact the virus is going to have on the global economy (which will ultimately be a function of the size and length of the disturbance), there is a wide consensus that the virus will have a significant negative impact on global growth this year.

coronavirus 600

The impact of the coronavirus has been particularly relevant in China, where most of the infections have occurred. Travel and work restrictions have now impacted manufacturing security and Chinese PMI (Measure of manufacturing output) recorded an all-time low in January and output continues to be well below where it was prior to the outbreak. With China now playing a major role in the global economy, this will have a flow-on effect to other economies, particularly those with close linkages to China. This includes Australia, where industries such as tourism, mining and education are particularly reliant on Chinese visitors and students. China’s role in global supply chains means that the reduced output from Chinese factories will have global implications on many global companies reliant on China.

The table below summarizes the impact on different asset class markets to 28th of February 2020:

coronavirus table

Source:Ekon

 

Exposures that we expect to provide some protection in this type of environment have performed well, with bonds providing positive returns (When bond yields go down, bond prices go up) and our exposure to foreign currencies has benefitted from the fall of the AUD. The table below highlights the extent of the fall in yields and the AUD since the start of the year:

coronavirus table

Source: Willis Towers Watson

As of March 2020, the US Federal Reserve has cut the benchmark interest rate by 0.5% to between 1% and 1.25%. The Reserve Bank of Australia has cut the cash rate by 0.25% to a record low of 0.5%. The consensus is that Central Banks around the world will cut interest rates to help soften the economic blow from the coronavirus outbreak.

Concerns regarding the outbreak becoming a potential global pandemic resulted in the fastest sell-off on record for the S&P 500, seeing the index drop 10% from its peak in the span of 6 days in February 2020.

coronavirus graph 1

How should investors react?

The spread of the virus is likely to have a wide range of impacts in the near term in China, including a sharp slowdown in factory production and behavioral impacts on consumer spending. Ultimately, there is significant uncertainty around the overall impact on the global economy due to the unpredictable size and disturbance which the virus may cause.

Superannuation is long term investment and investment markets always face risk and uncertainty. Our approach at WA Super is to build portfolios with multiple return drivers and invest in assets that are likely to do well when equities do badly. This has been the case so far, with alternatives, bonds and foreign currency exposure helping to reduce the impact on our diversified portfolios.

Against the significant falls in equity markets of around -8% in February, we estimate our diversified options (accumulation) returned around -1.4% for Diversified Conservative, -2.2% for MyWASuper and -3.5% for Diversified High Growth.

 

Investment returns can go up and down and are not guaranteed. All investments have risk, and past performance is not a reliable indicator of future performance. For more Information on risks associated with investing, read our product disclosure statement at wasuper.com.au. The information provided in this article contains general advice which does not take into account your specific objectives, financial situation or needs. Before investing, you should consider the appropriateness of this general advice with regard to your personal circumstances. You may also wish to obtain independent financial advice.

Issued by WA Local Government Superannuation Plan Pty Ltd ABN 64 066 797 162 AFSL 269009, as Trustee for WA Local Government Superannuation Plan ABN 18 159 499 614.

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