Newcastle Financial Planners & Financial Advisors

Starting Off Your Investment Journey

Harlan Marriott — Mon, 18 Jan 2021 01:23:05 +0000

Investing your money is a great way to grow your wealth, but it can be intimidating to someone who is starting fresh.

Investing is unique to each person because of the time and money everyone is willing to invest is different. Before you begin investing you should think about what sort of investing style you would like to adopt, how much money you can afford to invest, and your risk tolerance.

Investing style

There are two main investing styles that you can adopt. The style you choose will depend on the time and effort you’re willing to put in, and the sort of output you expect from your investment.

Passive investing: This is a hands-off approach that tends to focus on long term returns. The return from these investments will be stable and predictable.

Active investing: This is a lot more hands on. It requires you choosing and conducting the investments yourself. This will require a lot more of your time because you will need to continually be researching opportunities. The return from these investments, although risky, can be quite large.

As a beginner, the passive style might be more appealing till you can learn and understand the market well enough to invest more actively.

Budget

It isn’t necessary to invest a large sum of money, it is necessary however, that you are financially prepared to invest the amount of money you choose. You should be able to set aside an ‘emergency’ fund, aside from the money you are prepared to invest. This is because there will always be some sort of risk involved in your investment and you should not rely on quickly selling your investments to fund an emergency.

Risk tolerance

The risk involved in an investment is usually proportional to the expected returns (higher returns = high risk; low returns = low risk). You need to find a balance of risks and returns that works for you and the amount of money you are willing to lose. This balance might take some time, and at the start, you might choose to only invest in low risk investments.

It is definitely intimidating to start your investing journey, but outlining how much time, effort and money you are willing to commit will put you in a good position to kick start it!

To discuss your investment journey please speak with one of our financial advisors to discuss your current situation and needs. Contact us today.

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Strategies for long-term investing

Harlan Marriott — Sun, 13 Dec 2020 23:56:16 +0000

Given the inherent volatility of markets, it’s useful to remind ourselves of strategies we can utilise to meet investment goals. The fundamentals of portfolio construction can help position portfolios appropriately in times of crisis and volatility.

Exploit a long-run time horizon
Investors with a long horizon don’t need short-term liquidity, giving them an edge during market sell-offs. As markets fall, long-term investors have often generated excellent returns by buying quality distressed assets across major asset classes.

Additionally, if the market rewards illiquid assets with a higher risk premium, it makes sense to over-allocate to such assets, as it’s unlikely that they’ll need to sell during bouts of volatility. During financial and economic turmoil, investment horizons tend to shorten due to immediate cashflow needs or because of psychological factors. The last thing that any investor wants to do is sell an asset into a volatile and illiquid market.

The free lunch
Diversification is the rare free lunch available to investors: it can reduce portfolio volatility without reducing its return. A key challenge to achieving diversification is reducing the dominance of equity risk in a balanced portfolio. Even if diversification tends to fail in crises (as correlations spike across asset classes), it can still be useful in the long run. This matters more for long-term investors who face less liquidation pressure during market drawdowns.

Most portfolios have positive exposures to the equity market and to economic growth. This risk is difficult to diversify away, making those assets with a negative correlation to equities a valuable addition. Diversification however has limitations (one of which is the tendency for correlations to approach one during crises) and a strong risk management framework and avoidance of large drawdowns is key in generating good long-run compounded returns.

Risk-free is return-free
Risk-free assets like cash and government bonds no longer generate a positive inflation-adjusted yield and are returnfree. Long-run investors can position for ‘the portfolio rebalancing effect’ that is likely to dominate investment flows in the next decade.

Expected portfolio returns can be improved by increasing the weight of the most volatile asset class. The classic approach is to raise the weight of ‘high-risk, high-return’ equities and reduce the weight of ‘low-risk, low-return’ assets such as cash and government bonds. Taking more risk in this way, and getting rewarded for it, is an easy way to boost long-run returns for investors.

Minimising costs can come at a cost
Passive investing minimises trading costs. However, some costs are worth paying. For example, buying an index fund costs more than investing in a bank deposit, but the risk premium should make the cost worthwhile in the long run. In general, investors should allocate more to active products the less they believe in market efficiency. Minimising costs is not always smart; being cost effective and avoiding wasteful expense is.

The importance of being selective
Market outperformance – through the compounding of returns – can help investors achieve their financial goals. Excess returns can be an important driver of wealth creation, and actively managed funds offer the opportunity to outperform the market. Even seemingly small amounts of excess return can lead to significantly better outcomes.

Over the intermediate term, asset performance is often driven largely by cyclical factors tied to the state of the economy, such as corporate earnings, interest rates, and inflation. The business cycle, which encompasses the cyclical fluctuations in an economy over many months or a few years, can therefore be a critical determinant of market returns.

As volatility is ever-present in capital markets, protection in the form of safe-haven assets and portfolio diversification will be increasingly important for investors. However, today returns from defensive assets will likely be far less than historic averages. Due to central bank action, riskier asset classes like equities appear likely to attract increasing inflows over the coming decade. The traditional methods of portfolio construction – a long-run horizon, diversification, cost-control, and active investing – remain the best approach to generating sustainable long-run returns.

FOR MORE INFORMATION SPEAK WITH YOUR FINANCIAL ADVISOR

Source: Fidelity

Important Information
This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (‘Fidelity Australia’). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. Prior to making an investment decision, retail investors should seek advice from their financial adviser. This document is intended as general information only. Please remember past performance is not a guide to the future. Investors should also obtain and consider the Product Disclosure Statements (‘PDS’) for the fund(s) mentioned in this document before making any decision about whether to acquire the product. The PDS is available on www.fidelity.com.au or can be obtained by contacting Fidelity Australia on 1800 119 270. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider such matters before acting on the information contained in this document. This document may include general commentary on market activity, industry or sector trends or other broad-based economic or political conditions which should not be construed as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be construed as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s funds is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. References to ($)are in Australian dollars unless stated otherwise. Details of Fidelity Australia’s provision of financial services to retail clients are set out in our Financial Services Guide, a copy of which can be downloaded from our website. © 2020 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited. Source: Fidelity

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Staying on track

Harlan Marriott — Mon, 09 Nov 2020 23:00:23 +0000

As human beings, we have a natural preference for things to stay as they are. It’s a tendency psychologists refer to as status quo bias. But in a world where change is a daily reality, sticking to the status quo could mean getting left behind.

Regularly checking in on your retirement plan is always a sensible strategy. Keeping track of your finances becomes even more important in times of economic uncertainty. Given the changes we’ve seen due to Coronavirus, now is a good time to take a look at your retirement income plan with fresh eyes. We’ve put together a list of resources to help you.

Put your assumptions to the test

Making sure your retirement income is secure is an essential ingredient to a comfortable retirement. But many Australians rely on incorrect assumptions when making decisions about their money.

Are you 100% sure you’ve got the facts?

Learn how to protect your income from poor share market performance

Recent events in global markets have put money in the spotlight for many retirees. According to the ABC’s Covid-19 Monitor ¹, over half of the Australians surveyed are ‘very’
or ‘extremely’ concerned about the economic impact of the Coronavirus. In fact, they’re more worried about the economic impact than their own personal health risk.

The first quarter of 2020 has seen significant falls in both domestic and global share markets, which may have left you feeling concerned about the impact on your retirement income. The good news is, there are steps you can take to feel more confident about your money.

We explain the risk of poor share market performance in retirement and explore options to help you protect your retirement income.

Flex your budgeting muscles and keep spending on track

Chances are your spending patterns have changed since 2020 began. Research² for the first quarter of 2020 showed that overall, household spending behaviours were more conservative as significantly more consumers cut back on non-essentials. While many Australians are spending more on items like food and groceries, spending on eating out, holidays and travel has obviously fallen.

With less temptations for spending, now could be a good time to revisit your budget. Have any of your expenses gone down recently? Have you found there are things you can do without? What things have been essential to your lifestyle and wellbeing?

Staying on top of your budget is key to spending confidently in retirement.

Find out if your retirement income will last for your lifetime

With longer lifespans and less certainty in world markets, making sure your money goes the distance is more important than ever. It’s no wonder that 84% of older Australians rated the desire for regular and constant income as very important³. But how do you make that happen?

Put your retirement income to the test and get results that show:

how long your retirement savings will last;
whether you’re eligible for the Age Pension or an increase in payments; and

how much annual income you could guarantee for life by adding a lifetime income stream to your retirement income plan.

Get help from the experts if you’re feeling uncertain

At times like this, it can be hard not to worry. In fact, we’re hard wired to pay greater attention to bad news which can create anxiety for even the most confident investors. Talking to a financial planning professional can ensure you’re following a strategy to achieve your goals for your retirement income.

Call LT and speak with one of our financial advisors to day on (02) 4926 2300.

1 https://www.abc.net.au/news/2020-04-28/coronavirus-data-feelingsopinions-covid-survey-numbers/12188608
2 https://business.nab.com.au/nab-consumer-anxietysurvey-q1-2020-39188/
3 https://nationalseniors.com.au/uploads/09172675CRP_ChallengerReport_
RetirementIncome_FN_0.pdf
4 https://www.psychologytoday.com/au/articles/200306/our-brainsnegative-bias

Source: Challenger

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Embracing the fear

Harlan Marriott — Mon, 05 Oct 2020 03:20:56 +0000

Sharemarkets are the most volatile they’ve been in the past 20 years. Increased uncertainty, fear, forced and panic selling, as well as reduced liquidity, are all contributing factors to currently elevated levels of volatility.

A simple measure using intraday price fluctuations can be used to understand the extent of the current volatility in the market. The graph below charts intraday volatility since 2000, with the average being 2.8%. In March 2020, the intraday volatility however, was greater than at any other time and significantly exceeded the peaks during the period of the Global Financial Crisis (GFC) between 2007 and 2009.

In March this year there were nine trading days with volatility above 10%, seven of them consecutive. During the GFC there were only four days in total with greater than 10% intraday volatility and no consecutive trading days. Recent volatility has far exceeded other extreme world events which are represented by the peaks in the chart below, including the September 2001 terrorist attacks, the collapse of Lehman Brothers during the GFC, Black Monday on 8 August 2011 (which followed the credit rating downgrade of US sovereign debt), the US and Chinese flash market crashes of 24 August 2015 and news on Donald Trump’s likely election victory on 9 November 2015.

Despite having fallen from its peaks, volatility currently remains about twice the average.

Don’t fear volatility. Embrace it

With elevated volatility, you could be forgiven for looking at this graph and wanting to run for the hills. But the reality is that volatility is your friend when investing for the long term – with the at times extreme fluctuations in price presenting excellent (long-term) buying opportunities.

The causes of the current bout of volatility are certainly different and it is unclear if they warrant the elevated levels of volatility we’ve seen relative to other cycles. But in each of the previous bouts of market volatility, significant opportunities were presented to long–term, patient investors. It is hard to believe that this will be any different today.

Looking for an investment strategy or need help from a financial planning professional? Call the LT team to see how we can help.

Source: Allan Gray

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Fight The Flight

Harlan Marriott — Sun, 20 Sep 2020 01:08:04 +0000

We all know the old saying ‘buy low, sell high’ – right?

As fundamental as this may seem, when the reality of a market crash sets in, we see behaviour move from rational to irrational as investors abandon their accumulated wisdom and succumb to the prevailing panic of the day. However, as is often the case with old sayings, they are fundamental truths, which are supported by theoretical study. In this case, panic-selling at the bottom of the market engages both sequencing risk and longevity risk. In time to come, books will be written about the investment markets we have all witnessed in the past few months, and scholars will complete PHDs on the underlying psychologies at play.

But what should we do in the moment?

It is absolutely important that investors avoid emotional, panicked decision making. Investors who panic sell run the risk of selling low and crystallising losses in their portfolios. Even now, as local and international markets have fallen precipitously, the fundamental tenets of good investment remain unchanged: Quality assets, quality structures and quality management.

Ask yourself the following questions:

Are the assets in my investment portfolio of high quality?
Will the assets in my investment portfolio survive this period of economic uncertainty?
Does my portfolio earn sufficient income without having to crystallise losses?
Have I assembled a trusted cohort of professionals: financial advisers, estate planners, insurance brokers and fund managers?
Do I have confidence they will act as conservative stewards of my wealth?

As we emerge from the coronavirus, the pace of economic rebound cannot be guaranteed. What we do know is that investors who take a measured, calm and rational approach to their investments throughout this period will likely fare much better than those who allow panic to drive their decision making.

As mentioned, one of the largest risks that face investor portfolios of retirees or those leading up to retirement is sequencing risk. In short, this refers to the risk that you incur capital losses at the point of retirement or during retirement. At that stage, you simply won’t have time to wait for long-time market trends to recover your losses. Further, your losses are likely to be exacerbated by the need to sell assets at their reduced value to meet living expenses.

Failure to manage sequencing risk ultimately leads to elevated longevity risk, which is the risk of running out of funds in your retirement, or out-living your savings. This is a fundamental issue as we live longer, and particularly in the face of the market upheaval we are currently experiencing.

Of course, you can expect significant pressure to rebalance portfolios right now. The tumult in markets recently will undoubtedly have affected your portfolios and shifted the goalposts you had set in your retirement planning. Your financial adviser will be working to establish the best means of generating your portfolio objectives without significantly increasing risk or sacrificing capital values.

Indeed, keep assessing your portfolio: Ensure you have a trusted team around you to navigate this period; align yourself with fund managers and assets that have strong track records across multiple cycles; and ensure your portfolio aligns with your risk appetite. Most importantly, take care not to make fundamental mistakes that may have a negative impact on your portfolio, or your lifestyle, for years to come.

To discuss your investment portfolio or financial advice needs please contact our LT financial advisors. T: (02) 4926 2300.

Source: Latrobe Financial

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Economic Outlook

Harlan Marriott — Sun, 19 Jul 2020 00:19:47 +0000

The world began 2020 much as it ended in 2019. There was growing optimism in the global economy with expectations that the US and China had ‘buried the hatchet’ on trade disputes and the United Kingdom (UK) would be exiting the European Union (EU) in a less disruptive fashion. This optimism lasted until February.

The global economy

During February a growing virus outbreak in China known as the Coronavirus or Covid-19 started to feature as a major concern. As of mid-May, there have been over 4.3 million confirmed cases and over 300,000 deaths globally.

Governments all over the world were compelled to impose lockdown measures that shut down businesses and restricted citizens’ freedom of movement. International travel has almost entirely shutdown as countries have closed their borders. The economic damage caused by these measures has been stark, with millions of United States (US) workers filing for unemployment. Economists now expect a global recession to be caused by this shock. An economic recovery is expected towards the end of 2020. Substantial government spending and monetary policy, for example, interest rate cuts, will help with the economic recovery but it will take time for businesses to restart and jobs to return.

A second shock to the economy has been an oil price war that started in early March. Saudi Arabia sparked this price war by increasing production and discounting prices in a bid to punish Russia and other marginal producers. This was their chosen response when talks between global oil cartel, The Organisation of the Petroleum Exporting Countries (OPEC) and other producers failed after Russia refused to impose additional production cuts to increase oil prices. This, in addition to weak demand due to the global Coronavirus shutdowns, has caused oil prices to crash substantially. This is good for consumers due to cheaper petrol prices. However, for oil producing countries and regions in the US, this is expected to compound the economic damage the Coronavirus shutdowns were already inflicting.

Australia

Australia was not immune to the Coronavirus outbreak. The shutdown efforts appear to have been successful in limiting the human cost. As of late May, there have been a total of 102 deaths with only 948 active cases and over 5,700 people who have recovered. However, the economic cost has been substantial with expectations that the unemployment rate will rise to over 10%. Australia is expected to mark its first recession since the early 1990s over the June 1990 and September 1990 quarters.

This quarter saw the Reserve Bank of Australia (RBA) cut interest rates to a record low of 0.25% and actively buy Government bonds to keep long-term borrowing costs low. The Federal Government also intervened with substantial increases to unemployment benefits, for example the JobSeeker Payment, as well as a wage subsidy program called JobKeeper which aims to help keep businesses connected to their employees through this economic downturn. It is expected that lockdown measures will be gradually lifted during the June 2020 quarter following recent announcements by the Prime Minister. The economic recovery is expected to take some time, particularly as authorities want to limit any chance of a new wave of infections.

During the March quarter, the Australian share market fell (-23.1%). At a sector level, health care (+1.5%) and consumer staples (-4.3%) were the strongest relative performers but could not offset the negative performance in energy (-48.9%) or the financials (-28.7%) and property sectors (-34.8%).

The energy sector fall was due to two factors. First, the global shutdowns to control Coronavirus cases and second, the oil price war during March. These saw oil prices fall 65.6% during the quarter and had a similar impact on the share prices of companies with energy exposure.

Weakness in the property sector was triggered by the pressure of the shutdown on both retail and commercial tenants with landlords compelled to offer rental relief, which is hurting the earnings of the sector substantially in the short-term.

Fixed income and currencies

Bond prices rose, driving bond yields lower both here and overseas. In Australia, the RBA cut interest rates to a record low of 0.25% by 31 March 2020 and signalled its intervention in the bond market to keep the three-year bond yield at 0.25%. These measures supported bond returns as did rate cuts overseas. However, riskier bonds, such as business debt, lost value as investors were concerned about rising bankruptcies due to the economic impact of the Coronavirus. This saw negative returns for corporate bond investments.

The Australian dollar acted as a buffer for overseas investors, falling 12.7% during the quarter. Investors sold Australiandollars because they expect global economic weakness to reduced demand for commodities. This fall in the Australian dollar helps investors with unhedged overseas investments but raises the cost of imported goods.

Talking to a financial planning professional can help to ensure you’re following a strategy to achieve your financial goals. Speak with LT to see how we can help, call (02) 4926 2300.

Source: IOOF

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The true cost of an epidemic

Harlan Marriott — Mon, 25 May 2020 00:47:03 +0000

Recent events such as the coronavirus outbreak highlight the far-reaching effects of an epidemic. Following the initial devastation of these events, the true cost of an epidemic takes time to filter through the economy. In this article, we’re taking a look at the economic impacts that epidemics and pandemics have on a local, regional and global scale.

When did the coronavirus outbreak start?

The Chinese Government alerted the World Health Organisation (WHO) of several unusual pneumonia cases in Wuhan on 31 December 2019. In early January, the WHO announced that they had identified a new strain of coronavirus — 2019-nCoV. At the time of this article’s publication, there are over 80,000 confirmed cases and almost 3,000 deaths worldwide.

How do epidemics and pandemics affect industries?

The biggest impact on many industries in an epidemic or pandemic is supply chain delays. Industries rely on specific regions to source parts and products. Using the coronavirus outbreak and assembly lines for technology products, as an example, people in assembly lines typically work in close quarters. To contain the outbreak, factories in China have delayed restarting production after the Lunar New Year break. One smartphone factory, Foxconn, is expecting a 12% decrease in production as a result.

Tourism is another key industry effected by epidemics and pandemics. In Australia, measures to contain coronavirus, including halting incoming flights from China will have significant impacts on the tourism and education industries. An economist at ANZ expects Australia’s economic growth to decline by 0.5% in the first quarter due to fewer tourists visiting Australia and a delayed start to the academic year for international students.

How are individual businesses effected by epidemics and pandemics?

Businesses within the sectors most impacted by epidemics and pandemics experience the effects of an outbreak first. In Australia, for example, travel booking company Webjet experienced a 10% slump in its share price in late-January following the coronavirus outbreak. Other companies such as JB Hi-Fi and Harvey Norman have said their supply of electronics could be disrupted.

Small and medium businesses can often be the hardest hit. Businesses such as restaurants and retailers in tourist hotspots and tourism services companies will be among the hardest hit in Australia over the coming months.

How long does it take for markets to recover after an epidemic?

Market recovery following an epidemic is dependent on a range of factors. Following the SARS outbreak, for example, the Chinese Government deployed fiscal stimulus to aid in economic recovery. At the time of the SARS outbreak (first quarter of 2003), China’s economic growth was 11.1%. By the second quarter, the country’s economic growth fell to 9.1%. As the outbreak was contained, and fiscal stimulus was deployed, China’s economic growth recovered to 10% by the third quarter of 2003. Looking at other markets, the S&P500 posted a gain of 14.59% following the first confirmed case of SARS. The index posted a gain of 20.76% a year after the outbreak.

How will an epidemic or pandemic impact my investments?

The economy has changed since the SARS outbreak. China is now a much larger part of the global economy, accounting for around 17% of global GDP, compared to 4% in 2003, so the economic impacts of coronavirus may be more pronounced. The best thing investors can do right now is exercise caution and make sure their portfolios are defensively positioned.

To discuss how your investments may be impacted by coronavirus speak to your LT financial adviser. Your financial adviser can help you protect your wealth by implementing suitable strategies to minimise the impacts of these events on your portfolio.

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COVID-19 – Providing rental relief for the tenant in my SMSF property

Harlan Marriott — Fri, 03 Apr 2020 00:18:18 +0000

The economic impacts of the COVID-19 crisis are causing significant financial distress for many businesses and individuals.

If your SMSF has a property and a tenant in financial distress, you may be able to provide your tenant with rental relief under an agreed commercial arrangement. This may even be the case when the tenant is a related party or yourself.

Ordinarily, charging a tenant a price that is less than market value in an SMSF is usually a breach of superannuation laws. However, the ATO have provided guidance which allows SMSF landlords to provide for a reduction in or waiver of rent because of the financial impacts of the COVID-19.

For the 2019–20 and 2020–21 financial years, the ATO will not take action where an SMSF gives a tenant – who may also be a related party – a temporary rent reduction during this period.

What do you need to do?

There are some important things you should ensure are in place when you are providing a rent reduction to a tenant, especially when this is a related party.

Ensure the relief only applies to rent.
- Any relief offered to a tenant can only relate to the rent component of the lease agreement. The ATO concession does not extend to other lease incentives.

Ensure that the reduction in rent is only temporary.
- This means it should have an agreed period of time or agreed date where the rent is reviewed in light of the economic circumstances.

The financial difficulty faced by the tenant is linked to the financial impacts of COVID-19.
- Any negotiated rent relief will need to be measured against the COVID-19 financial impact suffered by your tenant.

Clear arrangements which detail the amount of discount, waiver or deferral of the rent.
- In evidencing that the rent relief is reasonable, it would be best practice if it is consistent with an approach taken by an arm’s length landlord.

Ensure you have proper documentation which allows your independent auditor to be satisfied that the temporary rent relief satisfies all of the above.
- This may take the form of a signed minute, renewed lease agreement or anything deemed appropriate to amend the terms of the lease temporarily.
- Even if you are both the tenant and landlord, the above should all be documented.

These are extraordinary times and the ATO is providing this guidance to allow SMSF trustees to be flexible and agile.

If trustees act in good faith in implementing a reasonable and measured reduction in rent because of the impacts of COVID-19 they should not fall foul of the law.

How can we help?

If you need assistance providing rental relief or whether this is the right action for you and your specific circumstances, please feel free to give me a call so that we can discuss in more detail. Alternatively, you can refer to the SMSF Association’s trustee education platform, SMSF Connect.

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Dealing With Market Turbulence

Harlan Marriott — Tue, 10 Mar 2020 00:23:04 +0000

The share market decline since the peak of 20 February 2020 has been fast and brutal.

Immense fear has now engulfed the market just like it has engulfed society through the perceived necessity to stockpile toilet paper. COVID-19 is undoubtedly impacting world trade with borders being closed and the world’s ability to trade normally being heavily curtailed.

In times of extreme market volatility like we are experiencing now, investors are faced with two choices:

1) Sell out and move to cash

2) Ride out the ‘storm’

Option 1 may feel like the safest thing to do right now but history has told us that this can actually do more harm to long-term returns than good.

This is due to the following:

1) As share markets can fall quickly, they can rebound just as quickly and getting the timing right to reinvest can be difficult. This may mean you ‘sell low and buy high’ which is the exact opposite of what is generally required to achieve strong investment returns.

2) If you are selling, someone is buying. For a trade to take place, there has to be a buyer and seller. Selling quality shares after they have dropped means someone else is buying that asset at a massive discount.

3) A well diversified portfolio includes exposure to ‘defensive’ asset classes such as fixed interest and cash. In times of market volatility, fixed interest assets can counteract market falls which smooths out the volatility and cash can provide liquidity to fund withdrawals such as pension payments.

The alternative is to ride out the storm and history has shown us that markets have always recovered and gone beyond previous highs. Whilst volatility may continue, our portfolios contain a mix of different assets and have been designed to weather such events.

If you would like to discuss your portfolio, please contact us.

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Understand the market impact of the Coronavirus

Harlan Marriott — Mon, 02 Mar 2020 05:32:44 +0000

It has been a turbulent start to the year with Australia beginning the recovery process from the tragic bushfires followed by the threat of a global pandemic with cases of the coronavirus (COVID-2019 as it is now known) increasing across the globe. Despite these events markets did not flinch in January, with equity markets generating strong returns for the month as liquidity conditions continue to be supportive of markets.

If we look at previous incidents of viral outbreaks, such as SARS in 2003 and H1N1 (swine flu) in 2009, short-term corrections were within the range of 5% to 15%. These corrections were followed by strong rebounds. The consensus view is that global growth will be down in the first quarter of the year as a result of COVID-2019 with the key variable being how long the threat of the virus persists.

While history is a useful guide in this case, it must be said that the effect of this epidemic is likely to be greater given China’s dominant presence in the global economy, given the faster spread of the disease and the measures taken to combat it. The extended closure of Chinese industry, restrictions on people movement, disrupted supply chains, declines in key commodity prices, bans on Chinese travel and the flow-on effect to confidence will severely hamper growth in China and the countries and regions most heavily reliant on China.

While at the time of the SARS outbreak China accounted for around 9.0% of global output on a PPP basis, it now accounts for 19%, and this proportion is only likely to increase in coming years, according to the IMF. China accounts for 18% of global tourism spending (up from 4.0% in 2008) while overall tourism (domestic and global) spending accounts for more than 10.0% of Chinese GDP and has been contributing almost 1.5% to annual GDP growth. To place China’s emergence on the global stage into perspective, in 2003 there were 20 million Chinese overseas visits and in 2018, 150 million. The Chinese economy accounted for about 30% of global growth in 2019. So, a drop in Chinese GDP growth to 5.0% for the year, assuming the virus is contained within a short period, would detract 0.2–0.3% from global growth.

China now accounts for around 19% of global output

Source: IMF, Lonsec

From an Australian equities perspective, we are likely to see earnings outlook downgrades across a number of sectors (based on Lonsec equities research), at a time of elevated valuations and a sub-par growth outlook. While earnings across the Healthcare, Consumer Staples and Infrastructure sectors should be relatively immune to recent events, 2020 earnings estimates for the Resources (Energy, Iron Ore and Copper), Tourism/Travel and Consumer Discretionary sectors are likely to see significant one-off earnings revisions, capturing the impact of COVID-2019 outbreak and the recent bushfires across Australia. However, such downgrades are unlikely to impact the long-term investment thesis for most companies and should be regarded as short-term headwinds, reflecting a series of one-off unfortunate events.

While there is a high degree of uncertainty regarding the COVID-2019 outbreak, research indicates that this event could pose a long “tail risk” for global markets should the outbreak get out of hand. In other words, it could go on for a while. These factors make it a challenging period for investors, where factors other than fundamentals are having a material impact on the trajectory of markets. In such an environment, balanced portfolio construction is critical to insulating your portfolio. The proof in balance portfolio construction has been reflected in the stellar returns from both domestic and international fixed income securities over the last 18 to 24 months.

If you feel concerned by the current situation we encourage you to talk with an advisor sooner rather than later.

Source Information: Lonsec Group

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