What FY22 may bring after COVID-19 bust and boom

The impact of COVID-19 was sudden and unexpected, taking markets by surprise.

As investors may recall, many asset classes quickly dived amid extreme volatility during March 2020, including the Aussie share market, which crashed 21 per cent over that month alone. 

But super fund members who held their nerve and did not panic were rewarded with a year of outstanding returns. 

According to ratings house Chant West, the median growth fund was up 18 per cent over the financial year to June 2021, with many funds delivering returns in excess of 20 per cent. 

So, how did this happen? 

A quick recap of FY21

It’s worth remembering that markets are generally forward looking. And by July 2020, the world looked a lot better than it had only few months earlier. Individuals, communities, businesses and governments had come together, adapting to new social norms to keep each other safe and economies going. 

Soon enough, this quickly turned into a full-blown economic recovery. As lockdowns and restrictions eased, record government spending circulated through economies and vaccines emerged.

Australian share market movements

S&P/ASX 200 Index

 Bar chart showing the S&P ASX 200 movements from 1996 to 2021. The market took ten years to recover from the Global Financial Crisis - a fall of 50% - but only one year to recover from Covid - a fall on 36%.
Source: BTIS

In the US, despite its lowest ever gross domestic product number at the start of 2020, the S&P 500 posted one of its strongest monthly returns since 1986 in August 2020, and Joe Biden’s Presidential election win in November proved a further positive turning point. 

In Asia, a resurgence in COVID cases in India towards the end of the financial year, along with soaring inflation due to heavy rainfall and increased energy costs, weighed on the recovery. But in China, all the share market losses since the start of the pandemic had already been erased back in October 2020, with growth remaining strong. 

Meanwhile in Europe, after Brexit terms were agreed in December 2020, the focus shifted to vaccine rollouts and economic recovery. In the UK, a gradual exit from lockdown in April 2021 lifted consumer confidence as the country hurtled towards its eventual “Freedom Day” in July 2021. 

Finally, in Australia, after a rocky start to FY21, plenty of support from government stimulus (think JobKeeper) and the Reserve Bank’s record low cash rate of just 0.10 per cent, helped with the economic recovery, surprising basically all forecasters at every turn. 

How did financial markets respond? 

In turn, most major markets continued to rally hard in FY21, with several share markets continuing to hit record levels.

In particular, the Australian and US markets both experienced an extraordinary rebound following the economic policy support from their governments and central banks. 

While interest rates globally were very low, or below zero since the start of the pandemic, cash and fixed interest unsurprisingly underperformed. But they still play an important defensive role in a diversified investment portfolio – providing some cushioning against large market falls, such as those experienced in March 2020.

Below is a chart that shows the one and three year returns of the key asset classes that typically super funds invest into on behalf of members. What we have seen is, even when putting aside the impacts COVID-19 has had on economies, the majority of these asset classes have delivered positive returns over these time periods. 

Strong returns from growth assets in FY21

 Bar chart showing that the following performed strongly in FY21 -  Australian Equities, International Equities Hedged, Emerging Market Equities, Australian Listed Property. The following did not perform so well - Australian and International Bonds, Cash.
Indices used (left to right) - S&P/ASX 300 Accumulation Index, S&P/ASX Small Ordinaries Accumulation Index, MSCI World Ex Australia Hedged AUD Net Total Return Index, MSCI World ex Australia Net Return in AUD, MSCI World ex Australia Small Cap in AUD, MSCI Emerging Markets EM Net Total Return Index, S&P/ASX 300 A-REIT Accumulation Index, FTSE EPRA/NAREIT Developed Hedged in AUD Net TRI, S&P Global Infrastructure AUD Hedged NTR Index, Advance Commodities Fund Benchmark, Bloomberg AusBond Composite 0+ Yr Index, Bloomberg Barclays Global Aggregate Total Return Index Value Hedged AUD, Bloomberg AusBond Bank Bill Index. Source: Bloomberg

BT’s super returns 

Our younger "Lifestage" members were the big winners. Those born in the 1970s to 2000s have around 90 per cent invested in growth assets in their funds and as such have benefited from the strength in share markets with returns of between 25.1 per cent and 25.6 per cent, outperforming median returns. 

With smaller allocations to growth assets, and a higher proportion of defensive assets (cash, fixed interest), our 1940s, 1950s and 1960s Lifestage members experienced more moderate returns. This is expected given our Lifestage funds are designed to gradually reduce members’ exposures to riskier assets, such as shares, as members approach retirement. However, returns for these members (between 8.4 per cent and 16.9 per cent) were also above median returns. 

Looking ahead

With September 2021 reporting the first negative month for global equity markets since January 2021, and the Australian share market’s run of 11 consecutive positive monthly gains also ending, this serves as a timely reminder that risky assets are impacted by global concerns. 

  • Global COVID-19 cases are now declining, and vaccines have helped reduce the severity of the disease. But we need to watch how northern hemisphere countries fare during winter and whether more highly contagious mutations occur.
  • Concerns are also developing over central bank rhetoric, including US fiscal and monetary policy, and the politics within the White House. Global central banks have also started to communicate a tightening bias. The US Federal Reserve has indicated it will move away from pandemic crisis mode in the coming months by reducing its government-backed security purchasing programme earlier than expected and bringing forward interest rate hike projections to 2023.
  • Tensions have also grown over the US's tolerance for debt, with the current debt ceiling now expected to be reached in December 2021, putting social security and defence payments at risk. If a default occurs, this is likely to result in significant market volatility. 
  • China’s government had to inject liquidity into its financial system after its second-largest property developer teetered on the edge of collapse in September 2021. 
  • A surge in energy prices in Europe due to low stock, high Asian demand, high carbon prices, supply chain bottlenecks and outages threaten to generate even higher oil prices. Also, given that energy is a major driver of inflation, this escalates concerns over the EU’s ongoing loose monetary policy.

Despite this, it’s still likely FY22 will deliver more stability in markets compared to the previous 12 months once the correction runs its course and major economies regain momentum. 

Australia’s record low interest rates (not expected to rise until 2023 at the earliest), unemployment below pre-COVID levels and support from governments and the banks, means we are well placed to ride this storm. 

Over the long term, both listed markets and unlisted assets, such as property and infrastructure, continue to provide good opportunities to build long-term wealth. 

As always, maintaining good diversification in super when investing is key because it reduces the exposure to single economic or market "black swans" or events. 

Finally by avoiding panic and staying invested for the long term, investors can make the most of rebounding markets – as FY21 showed in spades.

Managing your super investments is a privilege and a responsibility that we take seriously. At BT, we consider some key factors that help inform the decisions we make, so members can have the confidence that their money is in good hands.

Hear from Corrin Collocott, our Chief Investment Officer, for insight into the experience and investment approach of BT Investment Solutions.

YouTube video
FY21 has seen a rebound of markets and a return to calmer conditions – with BT super members receiving some of the highest returns seen in years.
From soaring energy prices across Europe, a potential credit crisis within the Chinese property market, to debt ceiling issues in the US, each region faced its own pressures during September 2021.
Historically, share markets always correct themselves after a fall. The current situation should be seen why superannuation is a long-term investment.
You may have learnt some valuable financial lessons during this pandemic to help prepare for future uncertainty and disruption.

This information is current as at 21 October 2021. It is general advice only. It does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to these factors and your personal circumstances before acting on it.

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