Market volatility and Coronavirus – Frequently asked questions

Insights into recent market impacts as a result of the Coronavirus outbreak.

Global share markets have experienced significant volatility since late February as investors try to assess the impact of the Coronavirus (COVID-19) outbreak and, over the last few days the collapse in the global oil price.

Factory closures across some manufacturing sectors (primarily in China) and travel-related bans now being imposed in other regions outside of China/Asia, are impacting global economic activity, company supply chains and in turn, company profits and consumer sentiment and spending.

Recently, oil prices fell following the breakdown of an OPEC deal to cut crude production. Russia and Saudi Arabia appear to be digging in and preparing for an oil price war. Texas Intermediate (WTI) futures fell US$10.1 per barrel to US$31.1. This event has similarly shocked markets and further aided the fall in share markets around the world.

What does it mean for my super fund?

The value of your super can change daily depending on how your super is invested. The value and performance of each investment option is linked to the underlying asset classes (types of investments e.g. shares, property, fixed interest, cash etc.) it invests in, and these fluctuate in line with the performance of these assets during changes in market conditions.

As your super may be invested in the Australian and/or international share markets, you may have experienced a fall in your super balance.

What does it mean for my investments within my super fund?

Your super can typically be invested into one or more asset classes (typically Australian and international shares, property, bonds and cash). You may have experienced a fluctuation in your investment value which reflects the performance of the assets your super is invested in.

Long-term growth assets, such as shares and property, tend to fluctuate and are more volatile in the short term, but over the long term generally produce higher returns than others, more defensive, less volatile, asset classes.

Whilst our portfolios are not immune to periods of negative returns, they are diversified across asset classes, which provides some protection when equity markets fall. We continue to hold our portfolio positions in line with our asset allocation targets and expect to continue rebalancing towards these targets throughout the current volatile period.

For long-term investors we advocate remaining invested. The current period of volatility could continue, however markets have discounted significant underperformance with little consideration to any recovery in growth towards the end of this year. However, if you would like to understand how your personal financial situation will be impacted you can speak to a financial adviser.

How are you managing liquidity in your super funds?

Superannuation is a long-term investment, and investors with a diversified portfolio can be less exposed to the impact of events affecting particular asset classes only.

For its MySuper and diversified choice options, BT conducts extensive stress tests when setting the annual asset allocations. 

While the current market disruption was not exactly foreseen by our models our diversified portfolios have moderate target allocations to illiquid or private market assets. For example actual exposures to illiquid assets in our MySuper products are currently very low at less than 1%. This means that we are highly confident that we will be able to meet our obligations to provide liquidity for any MySuper or diversified choice option member switching or making withdrawals through this difficult period.  

Members with allocations to one or two asset classes only should review the circumstances applying to the specific options they hold. 

What does it mean for my investments I have with BT?

For an investor, it’s important to remember the interplay between risk, return and the intended investment horizon. There have always been periods of market corrections as a result of geo-political and economic events and there will be so in the future. It is therefore important to remember that diversifying across asset classes and across sectors within asset classes is a useful approach to address an investor’s risk tolerance, being the trade-off between investment horizon, potential returns, and risk of loss.

At BT, whilst our portfolios are not immune to periods of negative returns, they are diversified across asset classes, which provides some protection when equity markets fall. We continue to hold our portfolio positions in line with our asset allocation targets and expect to continue rebalancing towards these targets throughout the current volatile period.

For long-term investors we advocate remaining invested. The current period of volatility could continue however markets have discounted significant underperformance with little consideration to any recovery in growth towards the end of this year. However, if you would like to understand how your personal financial situation will be impacted you can speak to a financial adviser.

What should I do?

Super is a long-term investment. Changing your asset allocation or investment strategy as a reaction to short-term market fluctuations is an important decision and depends on a number of factors including your accumulated assets, time to retirement and risk appetite. You should seek advice before changing your long-term investment strategy.

If you’re still accumulating super, and not intending to retire for a number of years, you might want to consider staying with your current investment strategy instead of trying to ‘time the market’. It’s important to remember that the performance of your super often depends on your time in the market which can be disrupted if you try and ‘time the market’ e.g. by switching out of a growth asset class when its performance is falling, and, switching back in when markets and unit prices are on the rise. It’s difficult to pick the top and bottom of the market, but sticking to your strategy over the long term will likely mean you are better placed to capitalise on growth and minimise losses.

Alternatively, if you’re approaching, or are in, retirement it’s important to stay focused on your long-term investment strategy. Keep in mind diversification (investing in different asset classes) when determining an appropriate investment strategy. Diversification can help manage risk and soften the impact in the event of a significant market fall.

Why didn’t fund managers see this coming and move assets to cash?

These types of events are unpredictable. Whilst our portfolios are not immune to periods of negative returns as a result of these events, they are diversified across asset classes which provides some protection when markets fall. We continue to hold our portfolio positions in line with our asset allocation targets and expect to continue rebalancing towards these targets throughout the current volatile period.

History also tells us that similar events result in a market recovery once certainty around containment of a pandemic becomes clear (e.g. SARS 2002), so for long-term investors we advocate remaining invested. The current period of volatility could continue, however, markets have discounted significant underperformance with little consideration to any recovery in growth towards the end of this year. However, if you would like to understand how your personal financial situation will be impacted you can speak to a financial adviser.

Will this be worse than the Global Financial Crisis (GFC)?

We’re not able to predict whether this will have a bigger impact on the economy than the GFC. However, the size of the moves in this past three weeks, particularly for equity markets, compares to periods experienced at the height of the GFC. Fixed income and currency markets have also reacted, though much of the shift in sentiment recently has been experienced across equity markets.

Importantly, the GFC was the result of extreme stress in global markets and banking liquidity exacerbated by a housing market collapse in parts of the US, whereas the current events relate to an ongoing health emergency that has impacted supply of goods and movement of people.

How long do we think this will last?

We’re unable to predict how long this will last.

What has BT done to protect its portfolios?

Whilst our portfolios are not immune to periods of negative returns, they are diversified across asset classes, which provides some protection when equity markets fall. We continue to hold our portfolio positions in line with our strategic targets and expect to continue rebalancing towards these targets throughout the current volatile period.

For long-term investors we advocate remaining invested. The current period of volatility could continue, however, markets have discounted significant underperformance with little consideration to any recovery in growth towards the end of this year. However, if you would like to understand how your personal financial situation will be impacted you can speak to a financial adviser.

What if I have invested for the long term and now want to retire? Will I be redeeming at a low?

We recommend you speak to a financial adviser to understand how this will impact your specific situation.

Written by BT Investment Solutions

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