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Concerned about share market volatility and your KiwiSaver? Why you should be calm

2 Apr 2020 by  Ed Tomlinson

Volatility should be expected when investing. Perhaps the biggest market falls resulting from the COVID-19 shut-down are behind us and switching to a fund with a lower allocation to growth assets now may not be the best idea. Reviewing your appetite for risk is a sensible action to do now (then continuing to do so on a regular basis). Be calm - investing is a long-term activity and investment decisions should be made based upon long-term goals and expectations.

It is an understatement to say the world has changed during the past six weeks. Few days go by without a new announcement from one government or another, seeking to reduce the transmission of COVID-19 by restricting free movement, and eye-wateringly large stimulus packages offsetting the income lost from the forced shutdown of businesses. The human cost will undoubtedly be huge, whether the direct loss of life from COVID-19 infection, or indirectly through loss of livelihood and wealth.

The first quarter of 2020 has realised the worst quarterly returns for New Zealand shares this century. This headline statement doesn’t capture the struggle investors have had to come to grips with during the unfolding crisis. Since our last update to members on 18th March, to the end of March, the NZX 50 moved by more than 3% either up or down on four of the 10 trading days.

Are the markets showing signs of improvement?

This uncertainty came initially from the frighteningly quick pace of the economic shutdown.  Now analysis is starting to turn a little towards assessing the length of the shutdown, and what may follow after the shutdown is over. This, alongside the economic support response has contributed to a more positive sentiment. The change, although volatile, can be clearly seen in the chart below.

Source: FactSet Research Systems Inc., as at 31st March 2020

The starting point for the upward move in the share market seems linked to the US Federal Reserve’s announcement to provide unlimited support to the US Treasury market (to buy bonds and bills) to ensure it can function smoothly and liquidity is available.

Despite the sentiment change it is much too early to call March 23rd the low market point of the crisis and the real low could still come.

Rather, we think members should view the recent improvement as evidence that the ratio of sellers to buyers has shifted positively and the appetite to take risk may have increased.

What do we not know? What do we know?

There continues to be large and important facts that remain unknown:

  1. How bad the pandemic is (due to a low level of testing in many countries).
  2. How severe restrictions on economic activity will be (yes, they can get worse).
  3. How long the restrictions will last.
  4. When the virus will stop spreading.

We know that the virus is continuing to spread globally, although New Zealand’s tough measures and geographic isolation helps its position. Still we expect the global health news is likely to get worse before it improves. Restrictions on activity will cause severe economic pain around the world, which is shown through the massive rise in workers claiming unemployment benefits. We know that uncertainty remains extremely high and share market volatility is likely to continue.

Looking ahead

While the local situation is likely to be the most important for your personal wellbeing and employment, unsurprisingly financial markets are taking much of their lead from the US. As recently as last week, President Donald Trump had said he wants the country ‘opened up’ by Easter. Trump’s aspirational goal has now moved to 30th April, although this new date could prove optimistic too if the experiences of New York and New Jersey extend to other states. If proven correct, the global recovery will be delayed.

We expect that once the current heightened uncertainty passes, more investors will become willing to take investment risk, and asset values can start to reflect their long-term prospects. Some early positives include:

  • The strong social measures by several governments, including New Zealand, has probably brought forward their date of peak daily infections.
  • Compared to the GFC, central banks and governments have acted more decisively with stronger commitment to helping the financial markets continue to function properly.
  • We are starting to see companies conduct successful capital raisings which improves their position to survive the shut-down.
  • There may be false starts to the market recovery, and the rally since late March may be one of several before the long-term recovery gets underway. This is normal market behaviour following a major share market fall.

What should you do?

We continue to have strong conviction that retirement wealth is most efficiently built through an investment in a diversified portfolio of growth assets held for a long period of time.  Aon KiwiSaver Scheme’s growth funds can provide this diversification.  Volatility, even extreme volatility, is to be expected occasionally. Indeed, while the current crisis is severe and quite unusual the investment losses in 2020 are not the largest in history in percentage terms. Therefore, unless you have experienced a significant hardship the best course of action may be to stay invested, and calmly wait for the better times that will inevitably come.

It might be a good time to consider your investment strategy reflecting your timeframe. Unless you are close to retirement, or wanting to withdraw your KiwiSaver money to help you purchase your first home, your investment goal date is likely to be many years in the future. That is a long time to take risk, recover from losses, and generate more returns.  So even though the COVID-19 losses have been painful this quarter, remaining invested in a balanced or growth fund may be exactly the right strategy for some members to stick with.

Our online Risk Profiler can help you understand your attitude towards risk, to help you determine which fund might be right for you.

Ed Tomlinson

Ed Tomlinson, CFA is an Investment Consultant and Head of Investments for the Pacific Region. He joined Aon’s UK asset management business in 2016 and was initially responsible for pension clients in the UK. In February 2019 he relocated to the Pacific to lead a team of investment consultants who advise clients in New Zealand, Australian and Papua New Guinea. Before joining Aon Ed worked for a leading European bank implementing fixed income strategies for insurance companies. He started his career in 1996 as a research analyst providing support to a leading Australian Listed Property Trust and multi-manager business. He is a CFA charterholder and was awarded a Graduate Diploma in Applied Investments by FINSIA.

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