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To say 2019/20 was challenging for investors is putting it mildly. From the US-China trade wars and Brexit, to Australia’s catastrophic summer bushfires and the global COVID-19 pandemic, the seismic shocks just kept coming.
As we look back over the year that was, many challenges remain unresolved but the fallout, for Australian investors at least, is not as bad as many predicted. After the plunge in global sharemarkets at the height of the COVID panic in March, diversified superannuation funds look set to finish the year close to where they began.
According to Chant West, the median growth fund, which typically holds 61–80% in shares and other growth assets, was down just 1.1% in the year to May and is on track to finish the year line ball with where it began.
The table below shows the annual price returns for major markets and assets.
Table 1: Financial year returns to 30 June 2020
|MSCI World Index||Unchanged|
|US 10-year bond||-1.38%|
|Aust 10-year bond||-0.43%|
|$A vs $US||-0.8%|
|Australian residential property|
|CoreLogic Home Value Index||-6.9%|
Global economic fallout
In its June 2020 update, with the world facing the worst recession since the 1930s, the International Monetary Fund (IMF) labelled the economic fallout from COVID-19 “a crisis like no other”.
The IMF forecasts global growth to fall 4.9% in 2020 before recovering 5.4% in 2021. China’s growth has plunged from 6.1% in 2019 to a forecast 1% this year and 8.2% in 2021. The US is forecast to fall 8% this year before rebounding 4.5% in 2021.
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While Australia has avoided the worst of COVID, we are not immune.
After 28 years of economic expansion, our economy contracted 0.3% in the March quarter and an estimated 8% in the June quarter. Two quarters of negative growth denote recession. The IMF forecasts Australia’s economy will contract 4.5% in 2020 before growing 5.4% in 2021.
After being briefly in balance in 2019, Australia’s budget deficit blew out to a record $65.5 billion in the 12 months to May. It is estimated that federal, state and territory governments have committed $295 billion in stimulus and support payments to help individuals and businesses weather the COVID storm. And it seems to be working. Australia’s unemployment rate is around 7.1%, well below earlier estimates.
Interest rates lower for longer
It now appears that record low interest rates are going to be with us for the foreseeable future.
The Reserve Bank of Australia (RBA) cut interest rates to the bone in 2019/20. Four cuts of 25 basis points took the cash rate to an historic low of 0.25% where it is likely to stay until employment picks up. Unemployment is not expected to recover to pre-COVID levels for at least two years.
Australia Cash Rate Target
The RBA has also set a target of 25 basis points for the three-year government bond yield, while the ten-year bond yield has dropped below 1%. That’s small reward for holding bonds for ten years and an indication that the market expects rates to mark time for a long time.
Low rates are a blow for retirees and anyone reliant on income from their investments. The best 12-month term deposit rates are around 1%, well below inflation of 2.2%. In other words, by putting your cash in the bank you are going backwards.
A resilient Aussie dollar
The Aussie dollar finished the year around US69c, close to where it started. But it was a wild journey along the way. After reaching a high of US70.8c in July 2019 it plunged to a 17-year low of US55.1c in March as the COVID-related panic on global financial markets reached its peak.
AUD/USD exchange rate
The rebound in the Aussie dollar in the June quarter was partly in recognition of Australia’s sure handling of the health crisis and its fiscal response compared with most other nations. However, a high dollar is not helpful for Australian exporters, already suffering from weak global demand.
Falling commodity prices
As the world slides into recession and economic activity falls, demand for commodities has also weakened overall.
Iron ore prices fell 14% in the year to June, while oil prices fell almost 33% due to a supply glut. The price of petrol fell below $1 a litre briefly, in a rare bright spot for Australian motorists even if they couldn’t go anywhere due to the COVID shutdowns.
One commodity bucking the trend was gold. Thanks to its traditional role as a safe-haven investment, gold prices rose almost 29% to US$1,781.60 an ounce over the year.
After ignoring signs of economic weakness all around them, Australian shares followed global sharemarkets to record highs in February only to come crashing back to earth in February. The ASX 200 fell 36% from peak to trough in a textbook display of the excesses of fear and greed that shares are known for.
As it became clear that Australia had managed to contain the spread of COVID-19 and the government rolled out its support packages, shares staged a partial recovery to finish the year down 10.9%. This was the worst performance from the ASX 200 in eight years, but some sectors flourished while others were flattened by the virus.
Share Price Accumulation Indices
Log scale, end December 1994 = 100
Sources: RBA, Refinitiv
Consumer durables (up 39%), pharmaceuticals and biotech (up 31%), retail (up 19%), software and services (up 18%) and food (up 16%) all outperformed. Banks (down 28%), insurance (down 26%), energy (down 31%) and capital goods (down 27%) were worst affected as consumers and businesses stopped spending and natural disasters took their toll.
Total returns from Australian shares (prices plus dividends, as measured by the ASX 200 Accumulation Index – see graph above) fell by 7.2%, the first annual fall in eight years.
Global shares were similarly mixed. The big winner from the COVID shutdowns was Big Tech, as the world retreated to their homes and their screens, buying, studying, meeting and working online. The US NASDAQ index – home to technology heavyweights such as Google, Apple, Netflix, Facebook, Amazon and Zoom – rose 26%.
Solid returns from residential property
Australia’s residential property market held up well in 2019/20, outperforming shares. The total return from residential property (prices and rents) on a national basis was 11.7%. This compares with a 7.2% fall in total returns from shares.
While the suspension of open houses and auctions halted the market recovery, only Perth and Darwin experienced annual price falls as the table below shows. The two biggest markets – Sydney and Melbourne – posted double digit annual returns.
Table 2: Residential housing values as at 30 June 2020
|Month||Quarter||Annual||Total return||Median value|
Source: CoreLogic Home Value Index
We are not out of the COVID woods yet, as it will take some time before the virus is contained and, hopefully, a vaccine is developed. Until then, markets are likely to fluctuate on the latest news of virus outbreaks, the re-opening of local and global economies, and the gradual return to work.
In Australia, the government’s economic update on 23 July should give a clearer indication of the future of JobKeeper and JobSeeker support payments. This will provide more certainty around the outlook for unemployment as well as business and consumer confidence.
The months leading up to the 3 November US Presidential election will add to global economic uncertainty and ongoing volatility on financial markets, especially if President Trump ramps up his trade war with China to shore up voter support. Once the election is out of the way, whoever wins, markets are likely to return their focus to economic fundamentals.
One thing is clear though. A well-diversified portfolio is the best way to ride out short-term market volatility and catch the uplift from market sectors and assets that continue to perform well during these turbulent times.