How lockdowns have affected investment returns, assets and sectors
March 13 2020 was the worst day on the Australian Securities Exchange (ASX) since the Global Financial Crisis in 20081. In the first 15 minutes of trading the value of the exchange plunged more than seven per cent. Yet, by the beginning of June 2021 the bourse had risen to a record high2.
The onset of COVID also hit the property market, driving down house prices in every capital city apart from Canberra. Then, after a fast recovery, prices continued to rise to a level which, according to KPMG research3, exceeded those predicted for a no-COVID scenario.
“Low interest rates played a major role in the strong performance of these two relatively risky asset classes,” says Jukka Viljanmaa, Senior Investment Manager at TPT Wealth. “Many investors saw an opportunity to get into equities while prices were relatively low, and low mortgage rates encouraged people to buy property.”
Changes ahead
Longer-term bond rates are now moving higher, as the market prices in expected future rises to the cash rate. So Viljanmaa expects both equities and property to become less attractive to investors.
“There will be potential for investors to move into assets with a higher fixed interest rate. This is on the back of the increases in inflation that we're seeing now. We’re also seeing an increase in credit spreads due to changes to the RBA and APRA Committed Liquidity Facility and the extra premium added to a base interest rate as markets begin to factor in a higher cash rate target. Together, these changes are opening up ways for investors to generate higher returns than are likely with term deposits,” he explains.
Diversification essential
In this time of lower rates in anticipation of an upward movement over the next few years, Viljanmaa suggests investors explore a diversified portfolio with little or no exposure to fixed rates.
“Floating rate notes, for example, can be linked to interest rates so they reset as rates change. That makes them attractive in a rising rate environment,” Viljanmaa says. “Residential mortgage-backed securities with a variable margin also reset rates every three months. Direct variable rate mortgages can also be repriced in line with higher rates. I expect as inflation and official rates increase, managed investment schemes and diversified cash and fixed interest funds will become more popular.”
Keeping track
When you have invested in a managed fund, the fund manager makes these decisions on your behalf. So how can you be sure you have the right managed fund?
“Due diligence is very important,” Viljanmaa says. “Every fund has a product disclosure statement which lists the assets the fund invests in as well as target returns, fees and risks – everything you need to compare one fund with another. You can also keep track of your investments by reading the monthly or quarterly reports. A managed fund provides professional expertise along with greater diversification and access to a wider range of asset classes than most people could achieve alone. In turbulent times, it’s worth making the effort to ensure your money is working as hard as it can.”
1 https://www2.monash.edu/impact/articles/accounting/when-coronavirus-first-hit-australian-investors-under-reacted-why/
2 https://www.afr.com/markets/equity-markets/asx-hits-record-high-as-economy-completes-rebound-20210602-p57xfs
3 https://assets.kpmg/content/dam/kpmg/au/pdf/2021/covid-impact-australia-residential-property-market.pdf
The views and opinions expressed are presented for informational purposes only and are a reflection of the best judgement at the time the content was compiled by the Senior Investment Manager, TPT Wealth.
